How the Great Financial Crisis changed how individuals and institutions invest, and why we shouldn’t invest solely focused on the next crisis.
In this episode you’ll learn:
- How investors changed how they invest following the financial crisis.
- How much has passive investing grown since the Great Financial Crisis.
- Why we can’t invest completely focused on the next financial crisis
- Why the unwinding of central bank balance sheets are the biggest uncertainty in the coming years.
Show Notes
How the Financial Crisis Still Affects Investors – Avi Salzman – Barron’s
How to Spot the Next Financial Crisis – Randall W. Forsyth – Barron’s
10 Years After The Financial Crisis – JP Morgan
Risk Taking Across Generations – Vanguard
Become a Better Investor With Our Investing Checklist
Become a Better Investor With Our Investing Checklist
Master successful investing with our Checklist and get expert weekly insights to help you build your wealth with confidence.
Episode Sponsors
Episode Summary
Ten years ago the American stock market and financial environment changed dramatically, and now that the market has recovered, people are beginning to ask questions about the next financial crisis. On this episode of Money For the Rest of Us, David considers the way people invest today versus ten years ago, and how an individual’s age impacts their investment strategy. He also explains the circumstances surrounding central bank balance sheets and offers a number of ideas to consider when determining your future investment strategies. It’s an enlightening episode not to be missed.
Investing has changed for all generations since the 2008 Great Financial Crisis
Today’s investors span generations, some that were hit hard by the financial crisis of 2008 and some that had not been in the market at the time of the crash. Recent studies have shown that current young investors who were not impacted invest very aggressively. For example, most millennials born between 1980 and 2000 have aggressive allocations, investing approximately 90% of their money in stocks. However, some baby boomer investors that lost up to 40% of their retirement funds no longer hold stocks, preferring investments in cash, metals, and cryptocurrencies. David outlines these differences on this episode, and it’s a discussion not to be missed.
An increase in passive investing has occurred since the financial crisis
One of the biggest ways investing has changed since 2008 has been in the increase in passive investing. This is achieved through index mutual funds and ETFs. Total ETF assets globally is $5 trillion, up from $0.8 trillion in 2008, according to J.P. Morgan. David quotes Marko Kolanovic, Global Head of Quantitative and Derivatives Stratagy, at J.P. Morgan that “This shift from active to passive, and specifically the decline in active value investors, reduces the ability of the market to prevent and recover from large drawdowns.” Even though no one is able to predict if this shift will cause a rush to sell in the event of a crisis, it is a noteworthy change investors need to be aware of.
Central banks, the Federal Reserve, and the unwinding of central balance sheets
The financial crisis of 2008 not only affected individuals but entire institutions as well. One component that impacts all parties is the balance sheets of central banks. Felix Zulauf, writing in Barron’s, explains that “While the Fed’s balance-sheet inflation since 2009 has inflated all sorts of asset prices, the serious reduction of its balance sheet should have just the opposite effect, namely to deflate asset prices.” David considers the fact that net purchases of the Fed, the ECB, and the Bank of Japan will go from the equivalent of $100 billion a month in the fourth quarter of 2017 to zero starting the fourth quarter of 2018. Savvy investors and strategists are all asking the question, “How will investors react to this change?”
Consider these questions when determining your investment strategy and contemplating the next financial crisis
As always, investing is not a specific science. There’s always a certain amount of risk involved. However, on this episode, David proposes a few guidelines and questions that can help investors prepare for and handle the inevitable next financial crisis. Consider the following:
- Investing in such a way that doesn’t require you to outsmart other investors or bet on the market being wrong
- Investing in opportunities that have a higher expected return, given the level of risk
- Being aware of market conditions and trends
- Investing with a strategy that doesn’t force you to be precisely right in order to succeed
Episode Chronology
- [0:40] Overview of how the 2008 financial crisis continues to impact investing today
- [6:48] Data on current investments and the stock market
- [8:40] How you invest depends on your experience in the 2008 crisis
- [11:41] Future investing is enveloped in big questions and unknown variables
- [16:10] The great financial crisis impacted both individuals and institutions
- [19:58] Should you invest in preparation mode for the next crisis?
- [26:00] Invest smartly by separating speculations from investments
- [28:40] Consider this when investing and thinking about the future of the market
