Op-ed: Lessons from past financial crises can become preparation for the future

Advisors

milanvirijevic

Are financial crises occurring more frequently?

There were nearly four decades between the crash of 1929 and the bear market of 1968. Fast-forward to the 21st century — only 20 years passed between three financial crises: the 2001 dot-com crash, the 2008 global financial crisis and in 2020, the Covid-19 pandemic’s economic recession.

What used to be rare, isolated events are increasingly becoming more frequent. In fact, 68% of investors with investable assets of $100,000 or more expect to live through more financial crises in their lifetime, according to Nationwide’s Advisor Authority study. What’s more, 35% of investors surveyed expect to live through three or more additional crises.

One of the best ways an investor can prepare for future financial crises is to look back at previous events. While the economic recession of the Covid-19 pandemic is certainly top of mind, the 2008 financial crisis still weighs heavily on investors’ financial decision making today.

In the Nationwide survey, 37% of investors were most likely to say the 2008 crash and subsequent Global Financial Crisis had the most profound impact on their approach to finances and investments. This surpasses the 2020 Covid-19 crash and recession (28%), as well as every other major financial crisis over the past century, including the 2001 dot-com crash (9%), the 1990 recession (6%), Black Monday in 1987 (4%), the 1981 recession (6%), the OPEC embargo in 1973 (3%), the bear market of 1968 (2%), the crash of 1929 and the Great Depression (5%).

Take a moment to think about your own experiences during the 2020 Covid-19 crash and recession or the 2008 Global Financial Crisis. What steps did you take to adjust your approach to personal finance or investing?

If you made a change, you were certainly not alone. Many investors changed their behaviors in response to the financial crisis that had the most profound impact on them. Sometimes the changes were for the better, other times they were not.

The top shifts investors made to their approach to managing their personal finances were establishing and following a budget (22%) and starting a “rainy day” or “emergency fund” (21%), as well as working with an advisor or financial professional (21%). The top changes to their approach to investing include managing investments more conservatively (20%) and adopting a new strategy to protect assets against market risk (17%), while at the same time using the market decline as a buying opportunity (17%).

Generally, these practical or cautious adaptations are likely to have been wise moves that affected financial outcomes positively.

On the flip side, some investors made more rash or emotional investing decisions.

These included liquidating assets from qualified retirement savings plans to cover financial obligations (12%), liquidating assets from non-qualified investment accounts to cover financial obligations (12%), moving the majority of their investments from stocks to cash (9%), and panic-selling investments at a loss (7%).

If you find yourself in a position where you are considering these types of actions the next time a crisis hits, it’s important to understand that they are likely to carry long-term adverse consequences. They should only be considered as a last resort in close consultation with a financial professional.

According to the Nationwide survey, advisors and financial professionals are more confident about their ability to navigate future crises than investors. After living through prior crises, 70% of advisors and financial professionals surveyed feel more confident about their ability to help protect their clients’ finances and investments should another crisis arise — compared to only 44% of investors.

Additionally, 66% of financial professionals feel more confident about investing their clients’ assets in the stock market, compared to just 38% of investors.

Investors can benefit from the knowledge and counsel of advisors and financial professionals. Their experience — forged through helping clients navigate past crises — makes them qualified to prepare their clients for the next time disaster may strike.

Over the past year alone, many investors have begun working with financial professionals.

The Nationwide survey found that 91% of investors agree that working with a financial professional helps them feel more confident that they can make the right investment decisions, even during an extreme financial crisis. Moreover, 89% of investors say that having a plan for their investments helps them feel in control — even if they can’t plan for everything.

I wish I could say with confidence that it will be a long time until our next financial crisis. The truth is most crises are hard to predict, but if history is any indication, at least one more is likely to happen again in your lifetime. That’s why it is important that we learn from past experiences and use that knowledge to prepare for the unexpected.

While we should all be students of financial planning, advisors and financial professionals are likely to provide a more powerful depth of knowledge to guide you towards the right decisions now and in crunch time.

It’s never too late to begin protecting your financial future – chances are you’ll be glad you did when the next financial crisis emerges.