Lessons Learned from the Global Financial Crisis

It’s been roughly 10 years since the 2007–2009 Global Financial Crisis began to unfold. It left lasting scars on the global economy and left many investors deeply wounded, too. Here, Tony Coffey, senior vice president and portfolio manager, Franklin Templeton Multi-Asset Solutions, explains why investors who sold everything in a panic probably bore the worst scars. He believes a healthier approach is to stick with a diversified mix of stocks and bonds and ride out the market turmoil, while rebalancing regularly.

Ten years ago, the world was standing on the brink of the Global Financial Crisis. US stocks, as measured by the S&P 500 Index, hit record highs in October 2007 before falling by more than 50% over the next 17 months.1

Most investors experienced some financial pain during that time, but some fled both stocks and bonds and went entirely into cash because they couldn’t stand watching their investments plummet. Unfortunately, many of those investors made the wrong move at the wrong time—selling near the market bottom and missing out on the rebound that occurred in 2009.

These days, there is no shortage of market commentators suggesting that investors should sell stocks and bonds before another possible market crash. And some investors may listen to their advice, believing they can reach their investment goals by buying and selling stocks and bonds at exactly the right time.

We believe it’s difficult for any investor to time the market. We prefer to take a more disciplined approach to investing by sticking with a set mix of global stocks and bonds, rebalancing from quarter to quarter, regardless of market conditions.

Building a Diversified Portfolio

To build a diversified portfolio, an investor generally would select a mix of global stocks and bonds based on his or her individual goals, risk tolerance and investment timeline.2 The chart below highlights how those broad asset classes have moved in different directions over the past 20 years.

With that in mind, we believe it’s important to find stocks and bonds that historically haven’t moved in the same direction at the same time, e.g., non-correlated. That way, one’s overall portfolio has the potential to grow, even if some of the investments in it are declining.

On the equity side, we emphasize selecting investments across:

  • the market capitalization spectrum (small-cap stocks tend to have greater risk-return profiles than larger, more established companies);
  • industries (cyclical industries can be more sensitive during downturns than non-cyclical industries); and
  • geographic regions (emerging market stocks can offer more growth potential and greater volatility, compared to those in more developed economies).

When it comes to fixed income, we believe it makes sense to have some exposure to global bonds, and diversify outside of one’s home country. In addition, global bonds don’t tend to move in the same direction as stocks, particularly during periods of uncertainty. Although past performance is no guarantee of future performance, global bonds rose 10.9% in 2008 and outperformed equities broadly that year.3