Throughout history there have been events that shape the perceptions and expectations of generations of investors. Wars and natural catastrophes (like hurricanes), and the grandaddy of all character defining economic events for Americans in the 20th centrury: the Great Depression.
A popular euphemism about the greatest generation is that they had a “Great Depression mentality” that shaped their saving and spending habits. They lived within their means, wasted little and saved a significant amount of their income. They did without. Debt was abhorrent to them.
I don’t know what historians will say about this decade and the Great Crash of 2008 but we’re seeing a noticeable shift in consumer spending and saving habits. I spoke with fifth graders about investing in March and half of their questions pertained to the Great Depression. It’s absurd to compare our current economic situation with that period of history, but our generation has not endured economic uncertainty like this before.
PIMCO, which is a well respected fixed-income money manager, projected a lower GDP growth rate and a higher than average sustained unemployment rate. We were used to 5% unemployment and 3% GDP growth and they are projecting 8% unemployment and 2% GDP growth, which is much more in line with Europe’s trendlines (as are our expected tax burdens, which I believe is a critical variable in their projection).
I don’t know if their predictions will come true, but I believe there has been a noticeable shift in the way people view their lifestyles and gauge needs versus wants. I know many people who are simplifying their lives by downsizing (even in this difficult real estate market), selling stuff, paying down debt and saving more. Dave Ramsey, a popular radio and television personality, has created a whole industry around this ten years before it came into mainstream vogue. If we sacrifice some GDP growth for paying down debt and saving more, its worth it if our balance sheets (i.e. our individual wealth) are more secure.
As a wealth manager, the Crash of 2008 has caused me to re-evaluate everything I do and why I do it. From asset allocation design to component selection. Our approach has always been conservative. We don’t swing for the fences. We use time tested strategies that have worked through good times and bad (our clients weathered the bear market of 2000 to 2002 brilliantly). But even our conservative strategies suffered under the onslaught of investor sentiment that bordered on sheer terror as institutional and individual investors dumped all assets to flee into treasury bills.
The Crash of 2008 is an economic character defining event. It will shape perceptions and impact investor behavior for at least the next ten years and probably many years beyond that. Statistically this is a once in a lifetime market experience, but from now on, we’ll have this scenario hovering in the backs of our minds as we design our portfolios and will plan accordingly.