How is this different than previous financial crises?

Learn from Larry Swedroe what history’s previous downturns can teach us about the current economic crisis, and how those lessons should influence our behavior in today’s uncertain financial climate.


Tim Maurer:
Hello, and thank you for tuning into Ask Buckingham, an ongoing video podcast series where we invite thought leaders from across many disciplines in personal finance to respond to the questions on your mind. My name is Tim Maurer and I have the privilege of hosting these short discussions as the director of advisor development for Buckingham Wealth Partners. And I want you to know that I’m also a wealth advisor with more than 20 years of experience and a client of the firm.

The volume of information coming at us these days is so vast. And the pace at which that information arrives is so fast, that it’s a struggle to keep up with what you need to know in order to make the best decisions for you and your family. Our hope, therefore, is that this ongoing conversation will become a source of clarity in the midst of confusion, and provide insight that helps you better understand what’s going on in the world financially and otherwise. Today we’ll be hearing from Larry Swedroe, Buckingham’s Chief Research Officer, and here’s the question we’ll be tackling. Larry, what past events in history would you compare this current crisis to? Is this similar to the great recession or perhaps 9/11? It feels like it has that sense of magnitude to it.

Larry Swedroe:
Yeah. Well, we get major sell-offs, Tim, like this, call it drops of 40%-50% plus. Historically, about every 15 years, we get bear markets more like every five years. And we get corrections of about 10% pretty much every year. So these are actually much more frequent than people think. I think your analogy to 9/11, a shock that nobody knew about and nobody knew how quickly we could recover. We didn’t know if there would be follow up attacks, for example. So you have this shock and awe to the markets and that’s what causes markets to crash.

This is unique in the sense that it is the single fastest drop from a market peak, which we had in early February down 30% so about a month. So that’s a record. So there is nothing like this, which of course creates even more fear that it could get a lot worse. And of course, ’08 turned into that when stock prices dropped 60%.

The problem for investors is we tend to think about investing in terms of risk, like going to the casino, where we know what the odds are of drawing that inside straight, but investing is much more about uncertainty. Things we can’t predict. We don’t know what the odds of a 9/11 occurrence or a Coronavirus happening. And people are much more afraid of uncertainty than they are of risk, and so they tend to flee. It’s a natural reaction. And that leads to panic selling.

Somebody reaches what I call their GMO point, where the stomach screams “Get me out!” And that cohort of investors at 15% or 20%, they sell or abandon a well thought out plan. And that pushes some people, or on margins say, aggressive investors. They now have to sell to meet their margin call. And then you have trend followers who are momentum traders. And they were long going into December, January, early February, as the market has been rising. Now, they have to get short.

So they’re selling first just to unload their current positions, then they go even shorter, betting on the market falling. That pushes prices down, forcing more GMO points to get hit, more margin calls. And lastly, there’s been another innovation, and this may be one thing that makes this different. In the last 10 years, we’ve seen a great increase, tens of billions a year, in what are called structured notes offered to investors.

Now, these are generally very bad products that banks sell to consumers that have very high fees and that nobody should buy. There are better ways to address the issue. But Tim, if you’re an investor, you’re told “Hey Tim, I can give you upside up to 10% of equities. And we’ll protect you if it goes down more than say 15%.” So these banks that sell these products, they now are short the market if it breaks through their barrier, which of course it almost certainly has. They now have to sell and hedge their positions.

So this is a new factor. All these who are short volatility are having to sell, pushing more GMO points, more margin calls, more momentum players, and you can get these waves of panic selling exacerbated by all the high-frequency trading, and the lack of liquidity because we no longer have market makers in the market. So you get these very fast, sharp drops, which scare people even more and you get this cycle.

My best response to this is your plan should anticipate this. Don’t panic and sell if it does, because one day, like on March 9, 2009, it bottomed out. The end was not over. The economy didn’t turn around, but stock started to recover, and they recovered at the fastest pace just about we ever saw, win on a bull market. I believe we’re going to get out of this. We’re likely to see something like that occur, but I don’t know when. And you get the reverse instead of a vicious cycle, you get a virtuous circle of the other way around.

Tim Maurer:
So these vicious cycles aren’t necessarily novel. There are things about investing today that seem to be compounding the pain of these downward movements in terms of volatility. But as you said, having this type of volatility has historically occurred maybe every 15 years or so. Of course, the last time we saw it to this degree was the Great Recession. Now a little over 20 years ago. In what ways is this current crisis similar or different to the Great Recession?

Larry Swedroe:
Yeah. I think it’s different this time around because most people believe this is likely to be short term in nature. Now, whether that’s 3 months, or 6, or 12 we don’t know. But secondarily, I think what’s really important is the Federal Reserve and central banks around the world learned great lessons from ’08-’09. They learned what are the issues, how quickly they need to respond by dropping interest rates.

And we saw the Fed has dropped rates dramatically in the last two weeks. They learned they must provide liquidity, to prevent the liquidity from drying up and no one can get any loans. That action we’ve seen. And we’ve seen Congress learn their lesson that they must come to the rescue quickly to calm fears and turn the psychology around, so I think we’re ahead of the game in that perspective.

Tim Maurer:
And as I think I’ve heard you say before, this is not necessarily a financial crisis the way that 2008-2009 was. This is a health crisis. And so the market’s going to respond differently to that as well, yeah?

Larry Swedroe:
Yeah. I think that’s true. Now, there’s no guarantee this won’t turn into a financial crisis, but I think we have to understand that the central banks are taking dramatic action to minimize that risk. Governments are taking dramatic actions to take that risk. I do want to offer one word of caution to our listeners. There are going to be some negative consequences here. Anyone who invested in not, say fixed income, is paying a price. The risks are showing up.

Municipal bonds of some States like Illinois, and Connecticut, and maybe Louisiana and others are going to be under pressure because their pension plans, which are already severely underfunded, are now going to be hit with a triple whammy because their tax revenue receipts in those states are about to collapse. The interest rate they can earn on their bonds has collapsed, and the equity returns are going to be bad, obviously.

So their assumption of earning say 7% on their portfolio is not going to be held up. Their revenues are down. So really important to stay with the safest fixed income, which is something we at Buckingham have emphasized for 25 years. And that strategy is definitely showing its merits during this time.

Tim Maurer:
Well, Larry, thank you so much for ending on that note of application, because there’s so much of what’s going on now that we have absolutely no control over. And I think it’s that lack of control that oftentimes ratchets up the fear and the sense of stress. So thank you for giving us some ideas about how we can individually apply this as well.

And thank you for tuning in to this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating to the website,, or emailing your question to Or just click in the upper right-hand corner here and it will take you directly to the website. Remember, there are no dumb questions, but unfortunately, there are plenty of poor answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good decision making. So please follow us, and by all means, Ask Buckingham.

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