This month marks the ten year anniversary of when the S&P 500 Index hit its highest point in October 2007 before losing more than half its value as the financial crisis unfolded over the next year and a half. While it’s difficult to identify market crashes in advance, there are important lessons to be learned from financial market history over the past three decades.
The article, Lessons for the Next Crisis illustrates six different serious market events that occurred between 1987 and 2008. It explains how a balanced and diversified investment strategy responded in the one, three and five years that followed each occurrence.
Among those events were the Stock Market Crash of 1987, the Savings and Loan Crisis in 1989, the Dot Com Crash in 2000, the Financial Crisis of 2008 and two others. While in some cases there were losses in the period immediately following the event, in all six cases, the balanced strategy showed positive returns in the three and five years afterward.
As we have seen, markets tend to reward investors who can maintain a steady path through difficult circumstances. Part of that path requires a willingness to accept increased uncertainty associated with the capital market returns we receive. The key is having a strategy you can live with because, in many cases, a recovery can come when you least expect it.