Lessons Learned from the Great Recession

Behavioral Finance
John R. Brock, Ph.D.

Before the turmoil of last decade’s Great Recession fades from our memory, it would be useful to reflect on lessons learned from this stressful experience. As you recall, the stock market was hit particularly hard during the financial crisis. From late 2007 through early March 2009, the Dow Jones Industrial Average and the S&P 500 both dropped over 50%. This was stressful indeed! If a portfolio drops by half, it takes a 100% increase just to get back to its starting value, and at a compound annual growth rate of 10% (the S&P 500’s long-term average), doubling the portfolio value would seem to take over seven years. No wonder stock market volatility strikes fear into many investors. How should long-term investors deal with such a bear market, and with market volatility in general?

When experiencing down markets, many investors, fearful of losses, sell their stock holdings and move into what they view as “safe” assets such as U.S. Treasury bills or money funds. Unfortunately, while T-bills do reduce volatility, they do not eliminate risk. Such a portfolio adjustment merely transfers the threat from one source (volatility) to another (lost purchasing power). To put this in perspective, consider the following data for December 31, 2007 through December 31, 2017:



Compound Annual Growth Rate

S&P 500


Treasury Bills





Even though the past decade included the greatest stock market decline since the Great Depression, the S&P 500 still delivered a compound annual growth rate of 8.5% (an inflation-adjusted rate of return of 6.9%). Conversely, investing in T-bills over this same period would have produced a paltry 0.3% annual return, which is negative when inflation-adjusted—more than 1% loss in purchasing power every year.

While investors who move into T-bills during a down market usually have every intention of returning to equities once the market bottoms, determining when the market reaches its lowest point is extremely difficult, at best. For example, the S&P 500 bottomed in early March 2009 but then skyrocketed 55% from that bottom over the rest of that year (not to mention the strong returns that followed later). Regrettably, most market timers remained gloomy, sitting on the sidelines and missing out on this remarkable recovery. In fact, the S&P 500 regained its pre-bear market level within only three years—less than half the time it would have taken had the market grown at its 10% long-term average rate. This is not unusual after bear-market bottoms.

Undoubtedly we will encounter bear markets going forward, but no one can predict when they will occur or how steep they will be. The takeaway for long-term investors is to resist trying to time the market, which inevitably leads to two mistakes: selling low and buying high. Warren Buffet expressed this well, stating, “The antidote to … mistiming is for an investor … never to sell when the news is bad and stocks are well off their highs.”