Those of us that lived through the financial crisis of 2008 as active investors remember it quite well.  Many who never invested at all may still remember it rather vividly.  What often gets overlooked is how quickly financial markets recovered in terms of asset prices.

In the aftermath of the financial crisis, the US economy began an incredible period of consecutive years without a recession.   A recession is defined at two or more quarters in which the Gross Domestic Product (GDP) contracted.  As of October 2018, the US has officially been out of a recession since June of 2009, a period of more than 10 years.    However, real GDP (GDP adjusted for inflation) has not exceeded 3% annualized since 2005.   The economic recovery has been relatively anemic by historical standards.   Only recently has there been any significant increase in capital expenditures as it relates to business investment among the nation’s top companies, which was up 39% in the first quarter of 2018 according a report published by the Tax Foundation.  So it’s certainly understandable why some may still feel as though the effects of the financial crisis continue to linger.

But what about your investment portfolio?

If you have 401k, IRA, personal investment account, or even a pension plan (which is supported by financial investments) the story is a bit different.    A closer look at various asset classes tells a story of a much quicker recovery in many areas of the financial markets.   Imagine you had the misfortune of beginning to make your first investment in September of 2007.   That was the very early stages of the financial crisis.   After significant immediate declines in asset prices, where would you be by September of 2017, precisely 10 years later?  Below is a list of various key asset classes and the average performance they produced over this time period.

Asset Class                           Average Annual Rate of Return

S&P 500 Index                                       7.20%

Ten Year US Treasury Bond          4.60%

Gold                                                              5.70%

Cash (3 Month T-Bill)                         0.40%

CPI (Inflation Index)                           1.70%

FHFA Home Price Index                  1.00%

Crude Futures Index (Oil Prices) -4.30%

As we look at the various different asset classes, we can see that even after suffering the catastrophic losses seen in 2008 into early 2009, the US stock market was still the number one performer on a total return basis 10 years later.

The first lesson to be learned is that one should never get too caught up in the emotions of what seems like a financial catastrophe.  The losses at the time were steep, with the S&P 500 falling by a staggering -49% at its lowest point of 2008, only to close the year with a -37.16% decline.  Then there was another -28% decline early in 2009 before turning positive for the year.   At the worst point during this decline, there was utter panic among many investors, and the media was more than content to help foster that panic in a quest to advance ratings.   It seemed as though it was the end of the world for investors everywhere.   Of course, it wasn’t the end of the world, nor was it the end of investing.

What a look back in the rear view mirror tells us as investors is that markets always recover in time, and given enough years, the stock market is typically the long term winner as it relates to performance.   This is not to discount the importance of other asset classes, including those referenced above.  Investing with a concentration in any one asset class is typically unwise, and any one stock even more foolish.   An investment portfolio should be well diversified, and maintain an allocation to various asset classes in proportion to the risk level that is appropriate for the individual.  That will be different from investor to investor, depending on numerous variables such as age, income need, and the timeframe to a specific goal.

However, what is important is that once an appropriate allocation of risk is developed, an investor must have the discipline to weather the storm of the next recession and market downturn.   These periods of downturns in the market are inevitable and expected to the seasoned investor.  As we see from the above referenced data, even the worst of downturns has ultimately not changed the end result.  Those who consider themselves to be a novice or relatively new to investing should remember that when the next market correction comes along with the next recession, there will be a few key phrases you’ll hear when you turn on the news channels.  They’ll tell you “This time it’s different”, or “We have never seen anything like this before”.

Perhaps it will be different.  In fact it likely will be, as each recession is unique in some way.  However, none of this should deter you from sticking to a soundly diversified investment portfolio, as that is an excellent way to outpace inflation and generate wealth for your future, and the future of your family.

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Russell Investments 2018 Q4 Executive Summary

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