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10-Years Later: The Impact of the Financial Crisis on Investor Behavior

| September 15, 2018
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Today marks the 10-year anniversary of the collapse of Lehman Brothers.  I remember that day and the frightening months that followed so clearly.  Given the impact of this Financial Crisis had not only on investors and advisors, but literally the whole world I wanted to reflect on the lessons we have learned from that experience and how it has impacted the way investors have behaved since then.  I also think that it would be appropriate that this anniversary should mark the start of our new blog and that this should be the first post. 

At the time Lehman collapsed, it seemed we were witnessing a string of falling dominoes and that more and more financial institutions were going to falter, potentially bringing down the entire financial system.  In fact, Lehman was not the first bank to topple.  Bear Stearns folded first, in March of 2008, before ultimately being absorbed by JP Morgan.  Given the rapid unwinding of both these institutions, it seemed that any other Wall Street bank or brokerage firm could easily suffer the same fate.  In fact, a few them came close. Finally, the U.S. government stepped in and, with the help of the U.S. Treasury and the Federal Reserve concluded that some institutions were “too big to fail”.  Even executives of the largest financial institutions were convinced to cooperate in the effort to prevent a complete collapse of the financial system. 

As we now know, the financial system didn’t dissolve in 2008 and the stock market didn’t go to zero. After dropping 57% from October 12, 2007-March 9, 2009, the S&P 500 stabilized and began a recovery.  And, oh what a recover it’s been.  Over the past 10 years, we have enjoyed one of the longest bull markets in history and the S&P 500 has gained 329%, dividends not included. 

So here’s the important question.  How has the recovery since the Financial Crisis affected investor behavior? Unfortunately, not as positively as you might expect.   Overall, investors appear to still be licking the wounds of the crisis even 10 years later.  According to a Gallup poll, in 2007, 65% of Americans owned stock but today, only 55% do.  While the stock market has had phenomenal gains, investors have largely been more conservative than before the crisis. 

Additionally, a recent article in Barron’s Magazine reported that stock ownership by age group has fallen for nearly every adult decade age bracket. The biggest drop in stock ownership percentage was for the 18-29 year bracket, which showed a whopping 26% drop.  (See chart) Apparently, those adults who came of age in the shadow of the crisis are the ones who have been most psychologically damaged.  Unfortunately, these Americans with the longest time horizons can afford to be the most aggressive investors and most likely need to and yet, they are not.  What’s equally surprising to me is that the only age bracket that has increased stock ownership has been those Americans over age 65. I don’t know whether it is because older Americans (those in or near retirement) are more likely to be receiving professional advice, the fact that they are more likely to have experienced major bear markets before or whether they have simply addressed the reality that investments outside of stocks have been paying paltry returns by accepting the need to have a higher stock exposure to cover their lifetime income needs. 

As a financial planner, the fact that individual stock ownership for Americans has decreased is highly concerning to me.  It speaks to the need for greater public education on investments as well as a greater need for people to access and benefit from professional advice and guidance. We believe strongly that a holistic financial planning approach, which draws a roadmap between the investor’s financial resources and their long-term goals, can ultimately provide the prescription that will lay out the necessary savings requirements and illuminate the appropriate investment allocation approach.  In our experience, people tend to be more open to seek out professional guidance once they begin to seriously think about their prospects for retirement and ask themselves the question “Will it be enough?”.  Hopefully, more younger Americans will begin to ask themselves this question before its’ too late and seek out the advice of firms like ours rather than let the baggage of past trauma permanently impair their future financial security. 

Through personal coaching and prudent guidance, we hope to positively impact the behaviors of our clients, leading them to better lifetime outcomes and less stress along the way.

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