Hey there, friend. I hope you had a good week and are able to enjoy a restful weekend now.
I want you to know how much I appreciate you being a subscriber. Unlike many newsletters, my goal is to create a genuine connection with you. I want you to feel comfortable reaching out to me anytime.
Because helping people unconditionally is what I’m all about.
And apparently it’s working because I’ve been getting some great questions and feedback! Keep them coming!
Question of the Week
“What the hell is going on with the banks? Another bank collapsed and I keep hearing that it’s not over yet. It’s starting to look like the 2008 financial crisis all over again. Is the stock market going to collapse?”
I want to thank the reader that submitted this question this past week. It’s such a timely topic, so I’m happy to address it today.
On the Stock Market
Bank failures are nothing new in the modern era. What we are experiencing today happened back in the late 80’s and again during the 2008-2009 financial crisis.
The following chart illustrates this:
From the early 80’s through the early 90’s, the US saw more bank failures than any time in the history of our country. Yet – despite this – the 80’s and 90’s was also one of the longest and strongest periods of stock market performance in the history of our country.
If you invested $100,000 in the S&P 500 at the beginning of 1980, you would have about $2,349,581.41 at the end of 2000, assuming you reinvested all dividends. This is a return on investment of 2,249.58%, or 16.22% per year.
On the other hand, the 2008-2009 banking failures resulted in the worst stock market crash since the Great Depression.
But despite this – if you stayed invested in the stock market – you did very well.
If you invested all your money in the S&P 500 on the day before the market began crashing (October 2007), you still would have doubled your money in about 10 years.
So, do we have another major financial crisis on our hands right now? Maybe.
Does it mean the stock market is doomed? Not necessarily.
And remember that over the past year, the Fed has raised their interest rate target from 0.00 – 0.25% all the way up to 5.00 – 5.25%. If the stock market does crash, they now have the ability to slash those interest rates again.
And lowering interest rates has always led to inflated asset prices (like stocks and real estate). This is a big reason why the recovery was so strong after 2008-09.
Missing out on huge recoveries is much more detrimental to your long-term returns than going through a temporary collapse.
On Mindset
Save Like a Pessimist, Invest Like an Optimist
This is an old blog post by Morgan Housel that is extremely relevant today (and always, in my opinion). Essentially, it talks about how it’s really common for bad things to happen. But at the same time, it’s also really common for people to overcome bad things and move on to new heights.
This is why the economy has always moved onward and upward, despite the inevitable recession from time to time. It’s why the stock market has always moved onward and upward, despite the inevitable bear market from time to time.
You may have heard of the term “100-year event” in the past. It is sometimes referred to as a “black swan event” as well.
This doesn’t mean that the event will happen once every 100 years. It means there is a 1% chance of it happening in any given year.
As this blog post states:
“If next year there’s a 1% chance of a new disastrous pandemic, a 1% chance of a crippling depression, a 1% chance of a catastrophic flood, a 1% chance of political collapse, and on and on, then the odds that something bad will happen next year – or any year – are … uncomfortably high.”
We need to accept this reality and create a plan to weather inevitable storms.
For this reason, I advise all my clients to keep an appropriate amount of emergency cash set aside, while staying fully invested in the stock market.
This emergency cash is meant to cover short-term cash needs, in the event of a market collapse. Because you don’t want to sell your investments during a market crash. This will crush your long-term returns.
And by staying fully invested, you get to fully participate in the stock market recovery.
As this blog post also states:
“All good investing comes down to surviving an inevitable chain of short-term setbacks and disappointments in order to enjoy long-term progress and compounding. Save like a pessimist, investing like an optimist.”