The Scars of 2008 Are Exaggerating Your View of Current Market Volatility

NEW YORK (MainStreet) — While recent weeks have shown how volatility in the market can evoke an intense reaction from investors, it still pales in comparison to the crash of 2008 — which has left lingering scars on investors.

Despite the more than half dozen years that have passed since the crash, more than two-thirds of Gen X-ers and Baby Boomers say they still feel the impact of the fall in how they live, work, save and spend, according to new numbers from insurance provider Allianz Life.

“Many of my clients are Gen X-ers and Gen Y-ers, and we have discussions about money and emotions regularly,” said Stephen Rischall, co-founder of 1080 Financial Group. “The recent correction as well as previous episodes of volatility does cause fear and panic for many investors. It not only reminds them of the recent financial crisis, but also the dot com bubble and for some the crash of 1987.”

Rischall said these emotions can lead to extreme aversion to risk — he even see the youngest investing generation — Millennials — pulling back and expressing their concerns about not wanting to lose any money.

“The difficulty for many retail investors is keeping a focus on the long term, especially if the investments are in any type of retirement account,” Rischall said. “In the moment emotions and fear take over, and can be detrimental to making financial decisions.”

Some 58% of Gen X-ers and Boomers said the 2008 crash fundamentally made them more cautious and even altered their thinking about risk and investments, and another subset -- termed "post-crash skeptics -- are exaggeratedly cautious with their financial strategy.

“The market crash of 2008 and Great Recession have profoundly impacted a majority of Gen X-ers and Baby Boomers,” said Robert Johnson, president and CEO of The American College of Financial Services in the Greater Philadelphia area. “They have become much more risk averse with respect to their investments, and this increasing risk aversion will negatively impact the amount they have saved for retirement. This has led to many Gen X-ers and Baby Boomers having an overly conservative asset allocation. “

Johnson said both Gen X-ers and Baby Boomers fall prey to “recency bias" - a behavioral finance phenomena. Investors tend to overweight recent events and assume that the recent past will continue into the future, Johnson said. As the crash of 2008 and the Great Recession are fresh in these people's minds, those events overwhelm the fact that from the end of 2008 through the end of 2014, the S&P 500 advanced at an average compound annual rate of 17.28% — meaning a dollar invested in the S&P 500 at the end of 2008 would have grown to $2.60 by the end of 2014.

“I also believe that people are overreacting to daily volatility,” he added. “We believe that investors would be wise to ignore the daily fluctuations in the stock market and take comfort that, over longer holding periods, volatility really hasn't changed much."

Elle Kaplan, CEO of LexION Capital Management, agreed that unfortunately, events like the market crash of 2008 have left some investors scared for years to come — and dips in the stock market often lead to nervous investors selling low and then eventually buying high.


“I always stress a long-term investment approach — and it can be hard to stomach in market dips, especially after 2008’s events,” she said. “What I remind clients is that the market has always gone up after a crisis, and that the best option is usually to hold tight and weather the storm.

“This holds true for 2008 – the market has recovered and is now significantly higher than it was before the crisis,” she adds.

 

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