Lessons from past financial crises prepare for the future

Are financial crises more frequent?

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

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

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

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

Take a moment to reflect on your own experiences during the Covid-19 crash and recession of 2020 or the global financial crisis of 2008. What steps have you taken to adjust your approach to personal finance or investing?

If you made a change, you were definitely not alone. Many investors changed their behaviors in response to the financial crisis which had the deepest impact on them. Sometimes the changes were for the better, other times they weren’t.

The top changes investors made to their approach to managing their personal finances were setting and sticking to a budget (22%) and starting a ‘rainy day’ or ‘fund’. emergency” (21%), as well as working with an advisor or financial professional. (21%). Key changes to their investment approach include more conservative investment management (20%) and adopting a new strategy to protect assets against market risk (17%), while using market decline as a buying opportunity (17%). .

In general, these practical or prudent adaptations were probably sensible measures that had a positive impact on the financial results.

On the other hand, some investors have made more rash or emotional investment decisions.

These included the liquidation of qualified retirement savings plan assets to cover financial obligations (12%), the liquidation of non-qualified investment account assets to cover financial obligations (12%), the displacement the majority of their investments from equities 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 occurs, it is important to understand that they are likely to have long-term adverse consequences. They should only be considered as a last resort in close consultation with a finance professional.

According to the Nationwide survey, advisors and finance professionals are more confident about their ability to weather future crises than investors. After going through previous crises, 70% of advisors and financial professionals surveyed feel more confident in their ability to protect their clients’ finances and investments in the event of a new crisis, compared to only 44% of investors.

Additionally, 66% of finance 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 advice of financial advisors and professionals. Their experience – forged in helping clients through past crises – makes them qualified to prepare their clients for the next disaster.

In the past year alone, many investors have started working with finance professionals.

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

I wish I could say with confidence that it will be a long time before 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’s important that we learn from past experiences and use that knowledge to prepare for the unexpected.

Although we should all be students of financial planning, financial advisors and professionals are likely to provide deeper knowledge to guide you to the right decisions now and in critical times.

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