The Best and the Worst of Times: Lessons From the 2008 Financial Crisis

Fifteen years on, the 2008 financial crisis offers up valuable lessons on investing for today and tomorrow.

 

Kurt Rosentreter remembers watching some of his clients flee to the investment sidelines as the 2008 stock market collapse unfolded. Never mind that it was a huge buying opportunity, with blue chip securities down as much as 60 per cent in value. “When you get a whack on your portfolio like that, it scares some people away that never really come back,” says Rosentreter, a certified financial advisor and a portfolio manager with Manulife Securities in Toronto.

Then there’s everyone else. For many Canadian investors, greed has trumped fear in the wake of the biggest global financial crisis since the Great Depression. Once the stock market recovered and entered a bull run for almost a decade, folks carried on as if 2008 never happened. 

“People’s memories are short, like they are in politics, and within a few years, they’re right back doing the same thing,” Rosentreter says. “If [they] think that they can make a quick buck, they’ll tend to throw some money at it. And that’s not changed much by major events.”

Fifteen years after the financial crisis, people still take more risks in the stock market than they should. But the crisis and its aftermath profoundly changed our investment behaviour in other ways – for instance, by prompting a real estate rush and shifting portfolios away from fixed income. Canadian investors of all generations were given valuable lessons on managing risk – handy in an increasingly complex and unpredictable world. 

One outcome of the 2008 crisis was ultra-low interest rates, which Rosentreter argues stimulated the real estate boom in Canada, leading to the now widespread pursuit of rental property as an investment. The downside? Cheap credit also made people slower to pay down their mortgages and prompted them to borrow more. At 107 per cent of GDP, Canada’s household debt is the highest in the G7.

Low interest rates also ended the reign of bonds and guaranteed investment certificates (GICs) as the mainstay of portfolios, Rosentreter says, by making it nearly impossible for retirees to live off that kind of cash flow. “It forced them into looking to other alternatives, like the stock market, whether they were comfortable with that or not.”

Stock market investors are now polarized, partly along generational lines, according to Don Stuart, executive vice-president of Vancouver-based Dixon Mitchell Investment Counsel. “There’s the one side that says, ‘We’re just going to buy the index because nobody can read the market and we want to keep fees down,’” notes Stuart, whose firm manages money for entrepreneurs and other wealthy clients. “The other side says: ‘I’m of the new generation, I understand technology, I’m on a Reddit group and I’m going to swing for the fences with some junior tech company or crypto.’” (The value of the global cryptocurrency market – widely regarded as a speculative bubble – has plunged from about US$3 trillion to just over US$1 trillion since 2021.)

At the same time, technological advances have made it easier than ever to play the stock market, while the rise of robo-advisers has empowered people to jump in, offering a middle ground between doing it themselves and hiring someone. But while investors have never had more information at their fingertips, Rosentreter warns against rushing into untested opportunities, even if it means missing out on early upside. “If you bet on the starters, much like people did in cannabis five years ago, you get cleaned out because you don’t know who’s going to be the winner.”

On the one hand, 2008 is a reminder that the stock market doesn’t always go up. On the other hand, it also shows how rare such catastrophes are. “Things are never as good as they seem in the market, and things are never as bad as they seem,” says Stuart, who has watched people become hardened to volatility. Many of his firm’s clients weathered the financial crisis and the smaller COVID crash of early 2020, and their behaviour the second time around was different. “I didn’t sense the same sort of panic, from an investment perspective,” Stuart says. “They saw that the worst thing they could have done was follow their gut.”

In the past 15 years, the world has become a more uncertain and unstable place. Stubborn inflation, the onslaught of generative AI and geopolitical events such as Russia’s invasion of Ukraine are just three factors that could challenge investors. Rosentreter says managing risk comes down to old-fashioned, common sense principles. 

In stock and bond investing, many variables can knock around your portfolio in the short term, he explains. So, “Don’t go into the stock market or anything risky unless you have at least three to five or more years of time horizon to weather the ups and downs and the noise of the markets day to day.” Index funds, which can consist of hundreds of stocks bundled together, diversify away from security-specific risk. Another proven principle: Buy low and sell high. Use a down market to find bargains – and when they go up, set a limit at which to sell them.

“If you’re happy making 10 or 15 per cent in three months or a year, year-and-a-half, [then] when you hit that marker, sell,” Rosentreter says. “If you get into a behaviour of taking the profit off and buying when [stocks are] cheap, you should be a successful long-term investor. But you definitely have to put short-term noise or short-term events into perspective. And they’re rarely of a magnitude that leads to anything catastrophic.”

Stuart’s advice? First, when buying stocks, make sure what you own is an investment, not speculation. “If something has no ability or likelihood to generate any cash flow, it’s a speculation,” he says. So, find a company that grows and deploys cash flow, bearing in mind that, at some point, its stock will be down. “That intrinsic value underneath will keep growing, and eventually, intrinsic value and share price meet in the middle.”

Second, accept that the market typically drops five per cent three times a year, 10 per cent once a year and 20 per cent every three years. “If you can’t stomach that, you’ve got to start adding GICs and bonds to the portfolio, but then your expected long-run rate of return is dropping.”

Then again, some people shouldn’t buy stocks at all. The biggest investment lesson of the past 25 years might involve fixed income, Rosentreter reckons. When interest rates were low, nobody wanted to buy a GIC yielding 1.6 per cent. “The problem was, it would have been so easy – whether you were a millennial or a senior – to just dive into the stock market.” For investors with limited experience and low risk tolerance, that GIC would have been a better choice. “And they didn’t do it, out of ignorance or greed or just the simplicity of being able to invest fast.” 

The takeaway? “Nobody should be running from fixed income because it doesn’t pay them enough,” Rosentreter says. “They should be buying what’s suitable for who they are, regardless of their ultimate returns.” 

A version of this article appeared in the Aug/Sept 2023 issue with the headline ‘The Best and the Worst of Times’, p. 40.

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