What If We Have Another 2008?

Before you read this, know that I'm not a Doomer. I'm a long-term optimist on America, despite our flaws. That doesn't mean that we can't or won't face some hard times in the future. From time to time, I try to think critically about what could go wrong...and to what extent it can go wrong. That's what this article is about. I hope you find it useful, and I'd love to get your thoughts as well.

We don't really talk about this anymore. It doesn't really show up on our backtests or charts, and that means something because I remember waiting for the time when the 10 year returns on portfolios would no longer pull in the 2008-2009 financial crisis.

We haven't really had a prolonged (painful) market decline since the Great Recession. Yes... we've had a couple of touchy moments. Yet, nothing really compares to the devastation of 2008. People were scarred for years after that event.

COVID gave us a small taste. There was real fear about the economy and what might happen...but most of the pain from COVID was felt in our daily lives, not in our portfolios. The massive stimulus by the Fed and our government's fiscal spending juiced asset values, and millions of people saw their investment accounts and property values increase quickly.

But, nothing is free. The printing and spending spree unlocked years of dormant inflation, and we were treated to almost a decade's worth of inflation in a short period of time. Many people continue to wait for prices to revert to 2019 levels, but that isn't going to happen. We had a permanent increase in the cost of living, and now we are all just praying that the "rate" of today's inflation can be slowed.

So far... it continues to be a battle.

The stock market continues to defy many experts by marching higher, bolstered by increasing revenues and profits.

Even now, many people still quietly wonder:

“What happens if the market crashes right after I retire?”​

A 5% pullback is not a crash, no matter what the news media puts in the headlines.

Market corrections of 12-15% are historically normal, and they typically occur about 1x every 12 months. Moreover, these corrections tend to happen very quickly now...sometimes within 1-2 weeks.

A "bear" market is technically when an asset or index experiences a 20% decline from a previous high.

Ok... so let's talk about a crash...

In my view, a crash can come in 2 flavors:

1) High Magnitude / Short Duration (Example: 2020 Covid Crash)

2) High Magnitude / Long Duration (Example 2008-2009 Crisis)

The first type of crash is quite unpleasant, and it can often test investors. The 2nd type of crash can permanently alter futures. I'm more concerned about the 2nd kind.

Let's also be clear that we aren't all on the same side this time around. There are millions of Millennials and Gen Z investors who would benefit immeasurably by a 50% decline in asset prices. Many of these investors could finally see a generational entry point into capital markets and abandon their crazy schemes with crypto and draft kings (I'm only half-kidding).

The main reason these younger folks stand to benefit is time. These funds have multiple decades to work and compound in their favor. This would be a good thing (for them).

My older Gen X investors and many Baby Boomers, who fall into the pre-retiree category, could be absolutely wrecked by a market collapse. The main reason is also time. The need for these funds to be used in retirement dramatically shortens the time horizon.

This is one reason why we adamantly share that retirement changes the investing equation. When you’re working and contributing to your accounts, market declines can often be viewed as temporary setbacks. But once you begin taking income from your portfolio, the stakes feel different.

And honestly… they are different.

The Real Risk Isn’t Just a Market Crash

Asset prices can behave strangely. In some cases, all it takes is a narrative (not facts or data) to drive prices wild. That's not really new.

But, what I would suggest to you is that a High Magnitude Crash that also has Long Duration. Many people have put plans in place -- but in my experience, Bull Markets can also cause people to drift from their defensive positions and become more aggressive. It's like we develop amnesia.

This is one reason why our plans must always consider the downside--and if we are building a strategy that can endure them.

What History Actually Shows

Over the course of history, markets have consistently recovered from:

Recessions

Wars

Inflation spikes

Banking crises

Political uncertainty

Pandemics

Interest rate shocks

What is often overlooked is the length of time it takes to recover. Investors are often coached to think about risk as "volatility." I want you to think about risk as "volatility that persists."

One of my friends and mentors often says, "Risk is what's left when you've thought of everything." And he's right. The biggest risk is the one we simply don't see coming.

Despite what anyone says-- unexpected economic events continue to happen at a fairly consistent rate. You'd think that with all of our data, information, and AI--we'd be getting the hang of economic forecasting. However, even the best of the best continue to be wrong.

Our goal is not to eliminate uncertainty. That's the price of admission--and it's also why we should expect to see a return on our investments. It's called a risk premium for a reason! Our goal is to prepare for uncertainty to simply be part of our journey.

The Investors Who Tend to Struggle Most

Ironically, the investors who often suffer the most damage during downturns are not always the ones with the "worst" portfolios. More often that not, its frequently the investors without a clear plan. Because without a plan:

Every headline feels urgent

Every decline feels permanent

Every decision becomes emotional

And emotional investing rarely ends well.

So What Actually Helps?

While no strategy removes all risk, resilient plans often share a few common characteristics:

1. A Clear Income Strategy

Retirement income should not rely entirely on selling investments at unfavorable times.

Many successful plans separate:

Short-term income needs

Stability reserves

Long-term growth assets

This can create flexibility during volatile periods.

If you're still working, you need to make sure you have an solid emergency fund and possibly even cash reserves. Some jobs can be eliminated during recessions, so part of your income plan needs to be having funds that can bridge a job loss.

2. Appropriate Risk Exposure

Too much risk can create unnecessary stress. Many people continue to be unaware of the actual risk they are taking during bull markets because they grow accustomed to seeing the numbers go up. It should be a normal practice to review your investments and rebalance your portfolios.

Some folks actually suffer from the opposite of too much market risk---they take too little. This brings inflation to the forefront because they will be running out of purchasing power over time. The goal should be balance.

3. Behavioral Discipline

Some of the best retirement outcomes come not from predicting markets…

…but from avoiding major mistakes.

Discipline matters.

Especially when emotions are elevated.

4. Preparation Before Crisis Hits

The worst time to build a plan is during a crisis. The worst time to panic is during a crisis. One of our favorite sayings is "Panic Early." I think there's wisdom in that.

Strong retirement and investment planning is often less about forecasting and more about preparation for the future. You want to make sure you are aware of your personal risk tolerance (how you feel) and your risk capacity (what you can afford to lose). These are two different things, and having the right mindset about risk can change everything.

Final Thoughts

Will we have another major market downturn someday? I believe we definitely will. Another financial expert who has shaped my thoughts on investing is Nick Murray. Murray recently wrote that he believed we "needed" a prolonged bear market because he felt that equities were in some of the weakest hands he'd ever seen. It's often said that bear markets are when stocks are often returned to their rightful owners--the long-term investors.

So, will we have another crisis? Almost certainly.

No one knows when.

No one knows how severe.

But history suggests volatility will always be part of investing.

The question is not whether uncertainty will come.

The question is whether your plan is designed to withstand it.

Remember: preparation + position > prediction

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