About 10 years ago, the wheels fell off the US housing boom, and the Great Recession cast its shadow over the country. For many, this was the first time in their lives that they had been so badly affected from a host of financial fronts.
Not only was it nearly impossible to buy a new home during this time, but as a result of a lack of buyers, home prices stalled and then began to fall. The effects of the Great Recession did not end there. The stock market has lost more than 50% of its value and tens of millions have lost their jobs.
With the loss of savings and income, fewer people were interested in buying a home and the result was housing prices falling off a cliff.
In this post, I will look at why the stock market lost more than 50% of its value during this time and look at what has happened since then. How did the government respond to protect investors? How have investors fared in the ten years since?
Let’s start looking at these questions.
Why did the stock market fall during the Great Recession?
The stock market downturn was caused by uncertainty. At the time, banks were underwriting mortgages and then pooling these mortgages into pools and selling them to investors. On the surface, this looked like a good fixed income investment.
But the problem was that banks were mixing up mortgages from different authorized buyers. In many cases, you had mortgages that were easier for the homeowner to pay off because they could afford their home.
Mixed with these mortgages were the loans for homeowners who could not afford their monthly payments and were exponentially more likely to default on their loans. Because the investors had no idea which mortgages made up the security pools they were buying, fear set in.
When you add in job layoffs, lost income, and a slowdown in the economy with fear, it’s no surprise that the market fell as if it did.
What we have done to protect investors
Since the Great Recession, many laws have been enacted to protect investors. Some laws have gone into effect to ensure this Money market funds cannot break the price. For investors, the biggest impact was the Dodd-Frank Act.
This law is broad in scope and protects investors in various ways. To find out the many ways you protect investors, You can read here.
The outcome of these regulations has either helped or hurt investors depending on who you talk to. But mostly, they have been helpful to investors in ensuring a safer trading environment.
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How did the investors perform?
When it comes to investors and the Great Recession, there are two distinct camps. On the other hand, you have investors who haven’t jumped off the edge and continue to invest. For these investors, they recovered their losses by late 2011 or early 2012.
The other group of investors, who fled the market, lost a lot of their wealth. So many were so scarred by the accident that many still do not invest to this day. This is a shame because we have seen the biggest bull run in the history of the stock market since 2009.
As of this writing, the market is up over 230% from its lows. In other words, had you stayed invested during this time, you would not only have made back your money, but more than double what you originally had.
Lessons for investors from the Great Recession
For investors, the lessons are the same tried-and-true lessons you hear savvy money managers talk about so often. The biggest thing is to not let your emotions dictate your investment decisions. This can be achieved by having a well-thought-out investment plan and choosing an asset allocation that best suits your risk tolerance.
Another important lesson from the Great Recession is investing for the long term. Smart investors during the Great Recession were buying The Motley Fool stock options as the market was trending lower. They know you are buying when the stock is for sale. I’ll admit this can be difficult, especially when you look at your 401k plan balance and see it’s dropping in value every day.
But by keeping a long-term view of things, you can be a better investor. Throughout history, investors have faced a lot of upheaval and in time, we’ve been through every event and bounced back from it. By taking a long-term view, it will help you to stay invested, even when the market is down.
Ultimately, the Great Recession had a huge impact on everyone’s financial lives. Many people are still trying to recover financially today. If there is one thing this event taught us, it is to live within our means and save our money.
When we live within our means, we are less affected when financial crises occur. And by making sure we have funds in place, we are not only better able to weather the storm but also invest when opportunities present themselves.
I encourage you to take some time and consider how the Great Recession will affect you and how you can prepare and protect yourself not only for the next big event but even with the next bear market. Because truth be told, similar events will happen again.