How Difficult Times Help Long-Term Investors
These are truly extraordinary times. Pandemics have occurred in the past, and each one exacted a different toll on society versus its predecessors. We tackled SARS in 2002, MERS in 2012, and an especially ugly bought of seasonal influenza during the 2017-2018 winter months. Historians also remind us how devastating a pandemic can become by memorializing the enormous loss of human life during the Spanish flu outbreak in 1918.
Now we have COVID-19, which in some ways has been elevated above other pandemics by social distancing requirements and a shutdown of a large portion of the global economy.
Behavioral finance academics help add perspective to crises like COVID-19 by identifying a condition among human beings, including investors, called “recency bias.” That’s when people place more weight on current events than on others that occurred in the past. When they do, difficult circumstances feel bigger, more challenging, and more difficult to solve than anything encountered throughout history. It leads to frequent use of the word “unprecedented” when describing current circumstances.
COVID-19’s disruption is real and the pain it has caused shouldn’t be minimized. This crisis is indeed unique and it will take its own place in history books. But it will be added to a long list of previous crises, each of which felt so challenging that we’d never recover.
Let’s walk down memory lane by revisiting some recent crises. Let’s remember how we felt at the time, and let’s explore what we learned from those experiences. We’ll see many similarities to the current crisis. We’ll also encounter important lessons learned and insights gained that are fortifying us as we battle COVID-19.
We’ll see how difficult times help long-term investors.
Do you remember how you felt when terrorists attacked New York City, Washington DC, and a plane over Pennsylvania fields? It was horrifying. Our new worries included possible dirty bomb attacks and sabotaged food and water supplies in the U.S. We also knew we were about to go to war against an enemy that seemed willing to fight to a bitter end.
September 11 was so shocking that we were certain life would never get back to normal. Remember?
But we got better at managing the crisis in the months and years that followed. We learned how to bridge to the other side of a near stop in economic activity. We also learned how to mobilize government and industry to concentrate on emergency needs. We decentralized the financial system so a physical shut down of Wall Street would never lead to a shut down on Main Street again.
We, as investors, still benefit from changes and improvements that were forced on us by the terrorist attacks.
2008 Global Financial Crisis
The Great Depression was back. Banks failed, markets were pummeled, and the very underpinnings of our free-enterprise system were shaken. Our savings and retirement accounts were halved, we or our neighbors lost jobs, and malaise entered the country’s collective psyche.
We described the moment as our “new normal” because we were certain growth and prosperity would never return. Remember?
But along the way we got better at managing the economic crisis. We adopted stricter capital standards to protect the financial system from future shocks, and we invented new monetary and fiscal tools to combat economic downturns.
We got better at managing distress in the financial system and a big economic downturn. Any that followed would be dispatched with greater speed and effectiveness as a result.
Once again, we enter seemingly uncharted territory. Will we ever eat at restaurants, fly on planes, or attend sporting events again? Will our economy enter a period that is permanently beset by poor operating conditions due to social distancing? At this point, it’s difficult to answer any of these questions with a sense of conviction.
It all seems so uncertain, just as it did during previous crises that now only appear in our rear-view mirror.
But there is good news. We’re already getting better at handling pandemics. So much better that the next one will likely be much less disruptive than COVID-19. Likewise, we’ve uncovered risks in the global economy that were mostly invisible prior to the crisis. Who knew moving manufacturing of medical equipment to foreign sources was so risky? We get it now.
Yes, we’re already getting better at crisis management as we respond to COVID-19. It’s what we do.
Our new insights don’t stand alone. They are added to hard-won predecessors that emerged out of previous crises. We’re currently benefitting from being forced to navigate September 11’s near stop in economic activity. The fiscal and monetary tools that policymakers are using to stabilize the economy were built during the Global Financial Crisis. This time, they just needed to quickly reuse them rather than take months to build them from scratch.
Each crisis listed above made the present one easier to conquer. This one will make us better at conquering the next.
Investing is, by definition, an expression of optimism. Its basis is belief that the future will be brighter than the present. Why will the future be brighter? Because improvement in the human condition is the natural byproduct of struggle. Through each crisis we face, we learn and we get better.
Our recovery from previous crises and ultimate recovery from COVID-19 sends a signal that the human spirit’s trajectory is ever upward and continues unabated. That’s why we invest.
By Scott D. Knapp, CFA - Chief Market Strategist
CUNA Mutual Financial Advisors
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