14 April 2024

Three Lessons from September 15, 2008

By Adrian Colarusso, CFA, CFP®

April 14, 2024

I found this old Wall Street Journal while tidying up my office shelves—an artifact representing my origins in the wealth advice industry. It was fall 2008 and I, a sophomore at Princeton, snatched this paper from the stack at the dining hall entrance. I read it over a breakfast prepared by my friends the omelet chefs, Louinet and Tyree.

As Lehman Brothers collapsed and stock markets plunged, CNBC blared non-stop in my dorm room. I vividly recall the mix of fascination and fear as the crisis unfolded—a crisis rooted in the real estate market, my dad’s industry. Within months he lost his job, and my tuition shifted from full-boat to full-aid.

I knew for sure that I was picking the right major. I had to learn everything I could about how money makes the world go ‘round and how risk can stop everything in its tracks.

Over the past 16 years, my education in this industry has reinforced key lessons:

A.B.C.D. – Always Be Carefully Diversified

In 2008, those heavily invested in concentrated portfolios—be it US large-cap equities, real estate, or Lehman Brothers stock—fared poorly. Many got shaken out of the game.

It’s better to ensure that you live to invest another day rather than foolhardily seek to maximize returns, and instead allocate wealth across assets that aren’t driven by the same underlying factors.

I’ll never forget the class I took Junior year, ECO 362: Financial Investments, where I first learned the math behind portfolio diversification.

Sparing you the Greek, the key insight is that a portfolio’s returns are equal to the average return of its underlying assets, but with less than the average risk. This asymmetry between risk and return is a holy grail of sorts, and why diversification is often referred to as “the only free lunch in investing” – a key tenant of our investment process today.

Don’t fight – or fear – the Fed

The Fed gets a bad rap sometimes. But I’ll tell you – the US Federal Reserve is the reason 2008 didn’t turn into Great Depression 2.0. The institution has gotten smarter since their policy blunders of the 1930s that prolonged the economic pain for over a decade.

Ben Bernanke, the Fed chair at the time, was a former Princeton professor who specialized in Depression-era economics. The world was lucky to have him at the helm when the financial crisis hit. No one understood better the Fed’s need to take more extreme, creative action to rescue the global economy from the brink of utter collapse.

The US stock market bottomed out in March 2009. Investors who were brave enough to listen to the Fed’s reassurances that they’d keep the banking system solvent were rewarded.

Last year, the Fed kept quiet on the question of whether they’d cut rates anytime soon. Yet bond market participants behaved as if they’d perform six rate cuts in 2024, which is looking exceedingly unlikely only months later. Have you seen the latest inflation data? Most of the time, it’s better to take the Fed at their word (or lack thereof).

The Fed has a simple two-pronged mandate: to promote full employment and stable prices, goals shared by all.

It’s a tough job, and things won’t always be hunky dory, but the Fed professionals have held the reigns quite valiantly, in my opinion.

Stay optimistic and never stop learning

2008 was a stressful time for a lot of people. I’m curious what your experience was.

Everyone’s suffering is relative – there’s always someone who has it better and someone who has it worse. Some are fortunate enough to choose not to suffer, letting the drama of the circumstances unfold, being affected by them as they may. Easier said than done, but also easier done in retrospect.

I, for one, am grateful for the trials and tribulations of 2008 – not only because it really wasn’t that bad for me – but because it kicked me into a new gear.

I found passion and purpose in a subject that mattered. And I was dumb lucky to study at an institution whose diversified endowment portfolio would not only put that roof over my head and food in my belly (thanks Tryee and Louinet), but help me develop frameworks around what I was observing in the real world. The greatest reward has been the opportunity to use this experience to help others.

For a lot of us who endured some tough sledding in 2008, everything did indeed work out alright in the end. Equity markets, property markets, and job markets recovered in due time.

I feel similar optimism today despite the many challenges we face. I’m confident that those with wealth to transport into the future will have many ways to do so. They should just maintain vigilance about risk and be ready to ride out short- to medium-term waves of volatility.

Where were you in 2008?

My hope with this newsletter is that I’ll hear some stories in return about how 2008 affected you. Please, put some time on to share, and we can talk about how to strike the right balance of cautious optimism to propel your wealth forward from here.