Most of us remember the days at school when we had our routine fire drill. The fire alarms around the school would ring, we would all calmly and collectedly stand up, form a line, and walk out of the school to a safe place. While I am sure many of us never had to experience an actual fire at our school, it was undertaken in order to prepare us for an actual emergency if one were to occur. After years of repetition, we all knew what we needed to do to get to safety.
2008 presented a “fire” many investors were not prepared for. Market volatility was at levels we hadn’t seen since “Black Monday” in 1987 and the events leading up to the Great Depression in 1929. Those investors who did not have a strategy for their long-term financial plan did what anyone would do in that type of circumstance: panic!
Within twelve months, stock markets around the world contracted by more than 50%. Many investors subsequently sold out and saw their lifetime savings cut in half. Still to this day, there are investors who will forever feel jaded by the capital markets and refuse to participate. Similar to shell shock, the level of stress, worry, and fear was so high that the idea of taking risk now raises their heart rate and blood pressure.
As financial professionals, it would be imprudent to say this kind of event will never happen again. In fact, we tell clients they should plan on it and be prepared for it. First and foremost, maintaining a risk exposure that is in alignment with your capacity is crucial. Second, keeping the possibility of experiencing another market downturn in the back of your mind, maybe even more severe than what we experienced in 2008, and analyzing its possible impact on your retirement readiness can help bring peace of mind. Lastly, going through a “fire drill” can help investors prepare for that day, month, or year, where panic can spread like wild fire.
It is difficult to simulate what that type of environment will feel like, but we can do our best to bring investors back to that time where we genuinely thought capitalism was coming to an end.
The video below takes us back to September of 2008, where there was a boom before the storm and the subsequent unfolding of hysteria that plagued the global markets.
When this time does come, be prepared by having your portfolio in alignment with your risk capacity, a sense of its potential impact on your overall financial plan, and by practicing what we use to do as children in our schools: staying calm and collected.
To determine your risk capacity, take the risk capacity survey. As always, if my firm may be of any assistance, please feel free to contact me or any one of our Wealth Advisors.
About the Author
Mark Hebner - Founder, Index Fund Advisors, Inc.
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.