Take a look at every recession we’ve been able to measure. How did the stock market respond? What can we learn from the past that is predictive of this moment? The answer is almost nothing.
People say, “It’s different this time.” They’re right. It’s different every time. This one is because of a pandemic. The first crisis of my career was in the 1970s: inflation, oil, and Vietnam. Then the savings and loan crisis, Black Monday, the Asian financial crisis, the dot-com bubble, 2008. The list goes on and on. Every financial crisis has a different cause. Crises keep happening because they aren’t predictable. People don’t realize that if downturns were predictable, things would self-correct. That’s the forward-looking nature of markets.
All these events do have one thing in common. Each time they happen, people say, “This one is different.” I keep hearing experts on TV calling this the “new normal.” It is true that every crisis is different, but I think the best way to deal with them is always the same. We can’t control crises, but we can control our response to them. You want to be prepared to deal with the unexpected before it happens. Not when you’re stuck in the middle of it. That’s why instead of calling what we’re going through right now the “new normal,” I’m calling it the “old normal.”
Let’s go back to first principles of dealing with uncertainty and the uncertainty of the stock and bond markets. Look at the probability of various outcomes, and then decide how much risk to take. Be prepared for market downturns once or twice a decade, but accept that you’ll never know when they’ll happen (we just had 11 years without a down market!). In other words, you don’t have to predict financial crises, but you should be prepared for them. This is why I always recommend having a financial advisor, who can help you understand the range of possible outcomes and create a plan tailored to your goals and acceptable levels of risk.
Planning for potential crises doesn’t just mean we are prepared for them when they come. It also means that we feel better both before and after they come, because we know we have a plan to deal with them.
If you don’t already have a plan that includes crises among the range of possible outcomes, it’s not too late to create one. I don’t make predictions, but I want all of us to be prepared. This is not the last crisis any of us are likely to experience. Let’s make proper planning the new normal.