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Preparing for financial crises

October 25, 2021

Even after last year’s COVID downturn and three other significant downturns in the last 50 years, it’s still the Global Financial Crisis that sticks in the minds of investors and financial professionals.

The seventh annual Advisor Authority study, powered by the Nationwide Retirement Institute, asked both investors and financial professionals how they view the impact of compounding financial crises, as they seem to be happening with greater frequency. Among the highlights from this study, just over half of financial professionals and investors said the Global Financial Crisis has had an impact on how they approach finances and investments—more so than the COVID-19 crash of 2020, the dot-com crash of 2001 or the “Black Monday” crash of 1987.

When markets wobble, investors are always tempted to head for the exits, if just temporarily. Market losses of 5% over a month, like we saw this past September, are neither unhealthy nor unusual in a normal market cycle. Since the bottom of the bear market during the Global Financial Crisis, the S&P 500® Index has declined 5% or more on an intraday basis on 26 occasions, including twice already in 2021. Of these 5%-plus downturns, the median decline was 8.3%. That isn’t surprising or alarming, especially considering the S&P 500 appreciated six-fold over this time.

Scaling the “wall of worry”

In theory, missing out on even small downturns of 5% should help investors compound greater returns by avoiding playing catch-up. But we invest in the real world, not a theoretical world. It’s practically impossible to time the market’s peaks and troughs well enough to avoid the downturns and capture most gains. What happens most often is that emotion takes over; investors are late to sell and late to buy. Instead of avoiding losses and capturing rebounds, the opposite occurs.

Market analysts like to describe how investors scale the “wall of worry” in reaction to bad news. But by focusing on specific events, market commentators often overlook the fact that investors are always on the wall of worry. What drives investors to shift from positive sentiment to negative is mostly how much “good news” is out there to distract from the bad.

compounding crisis chart of inflation

When market crises occur, it’s largely due to compounding forces—a steady build-up of bad news that pushes investors up the wall of worry, then a triggering event occurs to tip negative sentiment into full-blown panic selling.

Consider the table below, which details the six significant market crises—downturns of 10% or more—since the market low of 2009. Each crisis has a defining event; the coronavirus pandemic, for example, in the 2020 downturn. But other concerns were also on investors’ minds, and these issues built up gradually before the defining event induced panic.

defining events of financial crisis chart

Faster, stronger, shorter

What’s been interesting about these compounding crises over the last 12 years is how much the frequency and amplitude have increased. The complete downturn cycles (from market peak to trough to full recovery) have become shorter, the declines were faster, and the rebounds were quicker as well. Plus, the time between these cycles has shortened since the 2015/16 downturn.


market crisis descriptions

The 2020 downturn offers an object lesson in the dangers of market timing. That bear market came on quickly as investors began to grapple with the magnitude of the coronavirus pandemic. But the bear market low was set just a little over one month since the prior peak, marking the beginning of the rebound. Less than five months later, the S&P 500 had regained its lost ground. That’s a narrow window for market-timing investors to get their exit and re-entry points correct.

Also think back to the beginning of the COVID-19 outbreak–most of us had no clear idea about the direction the pandemic would take in the next year, or even the next day. An individual investor taking cues from daily headlines may have likely exited the market at the worst possible time. For many people, the seriousness of the pandemic hit home on March 11, when the NBA suspended the remainder of its season, or March 12, when President Trump announced restrictions on travel to and from Europe. By then, the market downturn was in full effect—March 12 saw the largest single-day point drop in the history of the S&P 500 to that point. (The drop on March 16 would be bigger.) But the bottom would come just seven trading days later, on March 23. At the time, no one could’ve known that day would be the turning point of the COVID bear market. Anyone who re-entered the market on that date isn’t necessarily a smart investor, just a lucky guesser.

Experience breeds confidence

After S&P 500’s run of record highs through the summer, September’s brief dip helped to remind investors that participation in the financial markets comes with exposure to risk and volatility. Many people seem to get that and expect more financial crises and downturns to come in the future. Among financial professionals who participated in our Advisor Authority study, over half (52%) said they expect to see three or more additional financial crises in their lifetimes. The share among participating investors who had the same response was 35%.

If there’s any plus side to financial crises, it’s that living through them gives investors and financial professionals the benefit of experience. The results from the Advisor Authority study revealed that past financial crises gave financial professionals greater confidence in their ability to help clients manage through a future crisis. 70% of financial professionals said they are better able to protect their clients’ investments in the event of another financial crisis. Moreover, 69% feel more confident about helping clients prepare for and live in retirement.

Likewise, investors who work with financial professionals and have investment plans feel more confident about facing a future financial crisis. 91% of investors in our study who work with a financial professional said this provides a boost of confidence that they can make the right financial decisions. 89% said they feel more in control of their financial plans, even when knowing they can’t plan for everything.

Both risk and volatility can be managed through diversification and asset allocation, but long-term success by and large depends on staying invested through thick and thin.

At Nationwide, we can help you stay up-to-date on topics in the markets and the economy to help you and your clients stick with their investment plans through future financial crises. Sign up for our blog updates to keep in the know.

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  • This information is general in nature and is not intended to be tax, legal, accounting or other professional advice.

    The information provided is based on current laws, which are subject to change at any time, and has not been endorsed by any government agency.

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