Published by Robert W. Huntley, CFP®, CHFC®, Founder & Wealth Advisor
March 6, 2009 – It was ten years ago today the US Stock Market meltdown finally bottomed out.
I remember it like it was yesterday.
It was no fun. Lots of anxiety and uncertainty.
The US and most world stock markets had been in a virtual free fall for months. Headlines were terrible. Major banks were on the brink of failure. Car companies were near bankruptcy. People stopped spending money seemingly overnight and economic activity ground to what felt like a halt.
Real estate activity stopped. I remember seeing so many California license plates on cars in the Austin area the prior couple of years. Then suddenly that stopped for the next couple of years. Nobody was selling and relocating because the value of their homes had fallen so dramatically.
Major brokerage firms forced to sell to other firms or go broke. Companies who were big household names.
And on that Friday, March 6, 2009, nobody had any idea we were finally at the bottom of the sell-off.
And nobody had any idea that starting on Monday, March 9, 2009, we would begin what has now become the longest bull market in US stocks in the past 100 years.
If we were looking at a typical bell curve, it’s fair to say that the market sell-off from 10/17/08 to 3/06/09 was certainly on the fringe of the curve. In a 5% range of potential events, it was simply put, a historic market event.
At the time most people relied on what financial planners refer to as “Modern Portfolio Theory” to manage risk in investment portfolios. Think of it as a pie chart. A little of your money spread around in stocks, bonds, cash and maybe a little real estate. The idea is that each of those types of investments moves a little differently from each other, so it levels out your risk when markets get choppy.
I remember that approach worked pretty well in the 2001-2002 market sell-off. However, it didn’t work well at all in the 2008 financial crisis. This time stocks fell, and bonds fell too. The only thing really holding its value was cash and treasury bonds.
By the time we got to March 6, 2009, it was not unusual to see what we typically viewed as a moderate allocation of 60% stocks and 40% bonds be off in total value in the 30-35% range. That was not a range of loss we would have expected, hence the 5% outlier on the bell curve mentioned earlier.
Like all things in life, what doesn’t kill you tends to strengthen you. Personally, I came through that time absolutely determined to find new ways to manage risk for our clients. Especially when you’re retired, you cannot afford that much volatility.
We no longer rely just on asset allocation or modern portfolio theory to manage market risks. Today we use several portfolio strategies that take advantage of options to either protect against big market sell-offs or generate gains when markets move up.
We still believe in the general principles of modern portfolio theory and continue to advise diversification among various asset classes. However, today we also diversify among strategies, each of them designed to do different things. That’s very different from where we were 10 years ago.
As a confessed optimist, it’s hard for me to focus on the next bear market lurking around the corner. I know markets do correct and you tend to get a serious correction every ten years or so. We saw a taste of what that can feel like in the fourth quarter correction of 2018.
It’s wise to be mindful of how much risk you can really stand in your overall portfolio holdings. You should carefully evaluate your current allocations to see if you’re taking the right amount of risk.
Doing so can be one of the more important things you do. Nobody knows what will trigger the next big market move down and when it will begin. As the old saying goes, you can’t control the weather, but you can adjust your sails.