By Zach Scheidt
This post Every Parent’s Worst Nightmare… And How It Relates To Your Bank Account appeared first on Daily Reckoning.
My teenage daughter had a minor collision on her way to work yesterday.
She’s totally fine. Everything is alright.
She was in a rush because her little sister took too much time getting ready and made her late. So as she was backing out of the driveway, she bumped into my wife’s car. Ooops!
As the father of teenage drivers, one of my worst fears is getting a call that my kid has been in an accident. The stakes are just so high as these young ones get their experience behind the wheel and learn how to handle different situations.
Thankfully, this collision was very minor. And it was all because her speed was so slow. In other words, her risk was very low because she wasn’t moving quickly.
I think there are some similarities between drivers and investors when it comes to crashes…
This week marks the 10th anniversary of the financial crisis and the news media has been making a big deal of covering the events that led up to the Lehman Brothers bankruptcy in 2008.
I remember the year very well. In fact, I was actually in New York City the week that Lehman Brothers went under. A few days before the actual bankruptcy, I had lunch with my contact at Lehman and the two of us walked through the company’s main trading floor.
Normally, this would be a loud bustling place with papers flying and brokers yelling orders into their headsets. But on this day, the floor was eerily quiet. None of the banks’ trading partners wanted to do business with them. And the brokers sat watching the price of LEH drop steadily, their own personal net worth (and their livelihood) literally withering in front of their eyes.
I’ll never forget that somber tension.
A day later, I was sitting at a Starbucks across the street, watching people walk out of the bank with their desks packed into cardboard boxes. It was so sad to see the despair in their faces.
As part of the financial crisis anniversary, a lot of people are asking the question, “When is the next crisis going to happen?”
And that takes me back to the teenage driving example.
Markets ebb and flow, and it’s natural for the economy to go through periods of expansion and contraction. That’s all well and good.
But the crisis ten years ago was much different than the natural ebb and flow of the market. It was brought on because investors and institutions were moving at a reckless pace, taking on too much risk, and putting our economy at risk.
Just like a teenager driving 20 or 30 miles over the speed limit, banks were lending huge sums to people who had no income. Individuals were buying and flipping houses for prices that were absurdly higher than normal values. The amount of debt in the economy was so high. These factors were BOUND to cause a problem at some point.
People say they were surprised and caught off guard by the financial crisis. But the truth is, you could have read the writing on the wall. People were quitting jobs to flip houses (even though there were far too many homes built than people available to fill them). Debt levels were astronomically high. And smart investors were warning that this type of activity simply wasn’t sustainable.
That’s why the crash was so bad. Because the speed of the economy, and the risk that individuals and businesses were taking was so high.
So that’s a lesson in history. But how does that help us today?
Well, today’s market is completely different from the environment that led to the financial crisis.
We’re not anywhere close to the breakneck speed that risked so much 10 years ago. So if we have a “collision” or a pullback in the market, it’s very unlikely to cause the same sort of panic and fallout that the financial crisis ten years ago did.
In fact, we’re in a very different situation with an open road in front of us and a chance for our economy to actually accelerate as tax cuts stimulate the economy, corporate earnings grow, and investors get more confident in putting their money back into the stock market.
That’s why I expect the overall market to push higher for the rest of this year and into next. Because there are so many strong catalysts, and we’re nowhere near the risky environment that led to the financial crash.
So today, you can invest with confidence despite all of the skeptics who are still fixated on the risks that hurt our economy so badly ten years ago.
Here’s to growing and protecting your wealth!
Zach Scheidt
Editor, The Daily Edge
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