John Grable, Ph.D., CFP®
It is April 2020. Not only is April financial literacy month, April puts college students one month closer to the day significant life choices must be made. For some students, the prospect of a summer job or internship is just around the corner. For others, summer school looms large, and for those in their final semester of school, graduation is coming up quickly. If you are a soon-to-be graduate, you are likely thinking about your next step, which could include full-time employment or graduate school.
Graduating seniors have lots of questions and concerns, not the least of which may be the status of the job market. During the best of times, the end of a school year can set off feelings of excitement, nervousness, and apprehension. In the world of Covid-19, this time of year may instead be setting off alarms of dread, fear, and loathing. If you are feeling this way it is important to gain perspective before setting off on your lifetime financial journey.
As you know, many people have lost their jobs as a result of measures taken to combat the COVID-19 pandemic. At the same time, the investment markets have been fluctuating widely up and down, with periods of sustained price depreciation. If you are like millions of others, you may be tempted to question the importance of creating and following a long-term spending plan, which includes regular saving and investing. Before giving up on your spending and saving plan, either now or in the future, it is worth stepping back for a moment to gain perspective.
There is some good news in the midst of what appears to be mass financial chaos and fear. Let’s start with a dose of reality. The Covid-19 pandemic has played, and will likely continue to cause, dramatic shifts in the way people interact and the way business is transacted. It is worth keeping in mind, however, that this transformational process, which seems unique to our times, is rather commonplace in the annals of economic history. In fact, history tells an important story. First, economic panics like the one we are living through right now are relatively common, and second, most panics are short lived. This means that if you convert your financial capabilities into daily actions you can emerge from the current financial crisis with a greater sense of financial control. Let’s take a brief walk through history to learn about other financial crises and see what happened.
- 1819. If you were alive 200 years ago, you would have lived through a devastating period when unemployment skyrocketed, the value of property plummeted, and investments tanked. Some religious leaders even declared the end of days. The panic was over by 1821.
- 1837. Stocks lost 60% of their value in just a few months. The panic was short lived with the market making a full recovery.
- 1847. Another wave of panic swept the country. By the end of the decade, stock prices had not only recovered, but prices were at record highs. Those who purchased stocks at low prices in 1847 accumulated significant wealth.
- 1857. Stock prices fell by 40%, but a full recovery followed.
- 1873. In one 10-day period, stock prices fell by 25%. Things were so bad that consumers started hoarding goods at home, but like all the other panics, people adjusted and moved forward relatively quickly.
- 1884. The stock market fell 50%. It is rumored that President Ulysses S. Grant was so impoverished that he had to write his memoir in order to help pay bills and fund his retirement. Yet again, people adapted and the economy rebounded quickly.
- 1893. Yet another 50% decline in stock values followed by a quick recovery.
- 1901. Americans lived through another panic that was quickly replaced with economic growth.
- 1907. This panic that was so bad that J.P. Morgan (the person not the company) had to lend money to the U.S. government to stave off a total collapse. Once people realized that the government was solvent, the economy shifted to full recovery.
- 1918. This panic was ushered in by the Spanish flu pandemic. It has been estimated that between 17 and 50 million people died during this calamity. Hoarding was the norm. Social distancing was practiced. The economy suffered. Yet again, the economic recovery was relatively quick.
- 1929. The Great Depression—probably the longest sustained period of economic despair—left millions unemployed and fearful about their economic future. Although it took some time, the economy did improve.
- 1973. This marked the beginning of a period of economic stagflation (the combination of high unemployment and high inflation) that caused investors to flee the stock market. Those who continued to invest with an eye on long-term wealth accumulation reaped significant rewards.
- 1987. A stock market crash followed by a panic. This crisis was over so quickly most people cannot remember the despair felt by investors.
- 2008. A panic of worldwide proportion. Those who continued to save and invest during the global financial crisis made large gains as the economy improved.
The common theme that runs throughout history is that those who are living during a moment of economic panic and chaos often become so fearful, thinking that what they face is unique and singularly dangerous, that they lose perspective. Fears turn to rash thoughts and actions. People stop saving and investing. In fact, they often sell their investments. This sometimes is the logical thing to do, especially if someone is faced with ongoing expenses and no employment prospects. However, for those who stick to their long-term spending plan, times of panic often provide the foundation for long-term wealth accumulation. There is nothing nefarious or illegal involved with making money. Accumulating wealth over one’s life involves—and this is a cornerstone of being financially literate—staying calm when others panic and sticking to one’s financial plan even when every emotion says to sell and join others in proclaiming the end of times.
Let’s end this story with one final note to those who will be graduating over the next few months. The job market may be tight. This will not be the case forever. The stock market may look unsafe and rigged against the small investor. This is an illusion. Those who maintain a long-term perspective almost always emerge from an economic panic with greater financial confidence. When you are feeling particularly worried, just think back to those people in the 1800s who experienced staggering and regular panics but lived to see better days. You will too, and when you get that job, start saving and investing. Over time, you will be very happy that you stuck to your financial plan.