It’s hard to believe it’s now been 10 years since the 2008 financial crisis. Let’s face it — no matter how busy or hectic your week has been, I’m betting it’s been a walk in the park compared to those times.
Yes, it was just 10 years ago this week that Lehman Brothers filed
for bankruptcy — the same day that Bank of America announced its plans
to acquire Merrill Lynch, and a day on which, not surprisingly, the Dow
Jones Industrial Average closed down just over 500 points. That, in
turn, was just a day before the Fed authorized an $85 billion loan to
AIG — and that on the same day that the net asset value of shares in the
Reserve Primary Money Fund “broke the buck.” This was made all the more
surreal to me because it was going on while I — and several hundred
advisers — were in the middle of an adviser conference. Not that the
folks on the panels were getting much attention.
The question that many of us have been asking ourselves (or perhaps
been asked by our clients) since is — why didn’t we do something about
it — before it happened?
Now, doubtless, some of you did. And those of you who didn’t can
hardly be faulted for not fully appreciating the breadth, and severity,
of the financial crisis we with which we were “suddenly” confronted.
Still, having lived through a number of other “bubbles” during the
course of my career, “afterwards” I’m always wondering why so many wait
so long — generally too long — to get out of the way.
Greed explains some of it: As human beings, we may later disparage
the motives of those who, with leverage and avarice, press markets to
unsustainable heights (from which they inevitably fall) — though we are
frequently willing to go along for the ride. Some of that can surely be
explained by our human proclivity to stay with the pack, even when it
seems destined for trouble, and some surely by nothing more than an
inability to recognize the portents that precede the coming fall. When
it comes to retirement plan participants, mere inertia surely accounts
for most, though some are doubtless waylaid by bad, or inattentive,
There is, of course, a behavioral finance theory called “prospect
theory,” which claims that human beings value gains and losses
differently; that we are more afraid of loss than optimistic about gain.
An extension of that theory, the “disposition effect,” claims to
explain our tendency to hold on to losing investments too long: to avoid
acknowledging our investing mistakes by actually selling them. It is,
of course, an attribute rationalized every time someone says that the
losses in our portfolios are “unrealized.” Unfortunately for investors
planning for their retirement, unrealized and unreal are not the same thing.
We all know that markets move up and down, of course, and we
must do the things we do without the benefit of a crystal-clear view of
what lies just over the horizon. We also know that “staying the course”
is the inevitable (and generally wise) counsel provided in the midst of
the markets’ occasional storms. And, unlike 2008, other than the
markets’ dizzying heights, and a fair amount of economic uncertainty
regarding trade policies and the like, to this admittedly untrained eye
there doesn’t seem to be the same sort of “bubble” that led to the 2008
That said, with the markets at all-time highs, and as we stand at the
10-year anniversary of the 2008 tumult, it seems a good time to ask:
Are you looking out for trouble — as well as opportunity?
- Nevin E. Adams, JD