Lessons from the Financial Crisis

It’s been more than 10 years since the 2007 financial crisis—the worst since the Great Depression. If you’re like most people, you’d rather forget the downturn. But recent volatility in the stock markets reminds us that it can be helpful to think about some of the lessons we learned—and the financial habits we should adopt.

A recent study analyzed the behavior of nearly 1.5 million participants in Fidelity workplace retirement plans, and more than 5 million clients with individual retirement accounts (IRAs), and found some common themes.

Based on that study, here are four lessons to keep in mind.

1. KEEP A LONG-TERM VIEW

Investments held for longer periods typically show lower volatility than those held for shorter periods. The longer you hold on to your investments, the more likely it is that you will be able to weather low market periods. Assets such as stocks tend to have higher returns over the long term, while assets like money markets tend to be more stable but have lower returns over the long term.

Consider this: From late 2007 through early 2009, the S&P 500 lost about 40% of its value. For many at the time, it felt like stocks would never recover. That is definitely not the case. Over the past 10 years, stocks have climbed to record highs. In the last 10 years, from June 2007 to 2017, the S&P is up 97%.1

In fact, according to the study, retirement plan savers who stuck with stocks grew their balances by an average of about 240%—roughly 50% more than investors who bailed out of stocks at any point in 2008 or the beginning of 2009.2

2. DON’T PANIC

The study revealed that the vast majority of people in workplace savings plans3 stuck to their long-term saving and investing plans during the financial crisis. But a small percentage panicked and moved their investments to a short-term investment (such as a money market fund) during 2008 or the first quarter of 2009, or stopped contributing to their retirement plan. For many, it took years before they returned to their pre-crisis savings rates or stock mix.

By the time those who bailed started saving and investing again, it was too late to overcome the effects of lost savings and growth opportunities.

  • For those who moved their investments to a short-term investment at any point in 2008 or the first quarter of 2009, their average balance rose 157% by June 2017.
  • That compares to a 240% increase for those who maintained stocks.
  • Likewise, those who stopped contributing to their retirement accounts saw their balances rise 191%, which is good, but it was far less than the 240% increase for those who kept saving.4

3. MANAGE RISK WITH A MIX OF INVESTMENTS

Using a mix of stocks, bonds, and cash to help manage the volatility of your portfolio is a key strategy for long-term growth. Research suggests that many workplace savers are better positioned than they were 10 years ago. Today, only 11% of those workplace savers who have been in their plans since before the crisis are holding 100% in stocks or 100% in bonds, versus about 26% in 2007.5

Looking at workplace savers overall, including those who joined their plans after the crisis, the trends toward holding a diversified asset mix are even stronger. Thanks to the adoption of target date funds such as the UC Pathway Funds as retirement savings plan defaults, nearly half are now invested in target date funds, including almost 70% of millenials.6 UC Pathway Funds help you manage risk by combining stocks, bonds, and other asset classes in one fund and automatically reduce the risk in your portfolio as you approach retirement.

4. SAVE EARLY, SAVE MORE

Increasing your savings is one of the most powerful things you can do to help boost the odds that you will be comfortable in retirement. And, the earlier you do it, the better. That’s because your money has more time to grow through compounded investment earnings. Consider this:

  • Saving $50 more a month at age 25 could grow to over $100,000 in additional savings at retirement.
  • Starting at age 45 could provide about $26,000 in additional savings.
  • It pays to start early, but even a small increase of $50 each month can make a difference at retirement.

NEXT STEPS TO CONSIDER

In light of the lessons learned from the financial crisis, you may want to take these steps:

  • Start saving (more). You can enroll in the 403(b) Plan in about a minute. All you need to do is visit UCRSPenroll.com or netbenefits.com. If you’re already enrolled, consider increasing your contributions by 1% or 2%.
  • Explore the UC Pathway Funds. The Pathway Funds let you choose one fund based on the date you think you will retire, or the year you plan to start taking money from your account. 
  • Analyze your plan. Get one-on-one help from a UC Retirement Planner to review your investments and explore ways to reach your financial goals. Call 1-866-682-7787 to schedule a session.

Target Date Funds are an asset mix of stocks, bonds and other investments that automatically becomes more conservative as the fund approaches its target retirement date and beyond. Principal invested is not guaranteed.

1 Source: FactSet. Returns based on the S&P 500 Total Return Index.

2,5 The average savings rates, account balances and asset allocation data in this story are based on a longitudinal study of active participants in Fidelity record-kept corporate defined contribution savings plans. The data looked at a cohort of 1,470,700 participants who were active in workplace savings plans for the entire period from June 2007 through June 2017. Please note that past performance is not a guarantee of future results and the averages can obscure significant variation for individual account results.

3,6 Based on Fidelity record-kept corporate defined contribution plans, with 22 million participants, as of June 30, 2017. Data in this presentation exclude tax-exempt plans, nonqualified plans, and the FMR Co. plan. It includes data from the Fidelity Advisor 401(k) program. The age bands for the average asset balance were defined using birth years: Baby Boomer 1946–1964 (723,386 participants), Gen X 1965–1980 (681,688 participants), and Millennial 1981–1997 (59,138 participants).

4 Average account balance for continuous participants in Fidelity workplace savings plans for the 10 years from June 2007 through June 2017. Source: Fidelity.

S&P 500 Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.

It is not possible to invest directly in an index.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

Investing involves risk, including the risk of loss.

Fidelity Brokerage Services LLC, member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

©2018 FMR LLC. All rights reserved.

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