Is Your Lifeboat Ready to Weather This Market Correction?

The S&P 500 is down 24%, real estate is down 20% and, even our defense, the bond market is down 10- 20% worldwide. Today on ThinkSmart with TMFG, Senior Financial Advisors Rob McClelland and Mike Connon look at the 5 biggest market corrections in the last 50 years and how a well-balanced portfolio performed. They review from the beginning of each market correction to 5 and then 10 years after the correction to demonstrate how investments would fare.



Rob (00:00):

Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management. And this is ThinkSmart with TMFG.Today on Think Smart with TMFG, Mike and I are once again going to review the lifeboat drill.

Mike (00:19):

Now, why do you want a lifeboat, Rob?

Rob (00:21):

Well, as you know, if you ever go on a cruise ship, before you leave shore, they go through this lifeboat drill. And they show you what would happen in the event that you are maybe like the Titanic and you hit something like an iceberg or a rock, or something happens in a storm. And you’re ready just in case something bad happens.

Mike (00:43):

I guess, the story behind the Titanic was they thought it was so well built it wouldn’t need a lifeboat. Unfortunately, it turned out to be a incorrect assumption, right?

Rob (00:51):

It certainly did. So if we look at where we are today, the numbers have just come in for the end of September and things are not good. For the first time in a long time, the stock market is down. And how badly? Well, the S&P 500, the top 500 companies in the US, is down almost 25% year-to-date, or 24.77. Real estate markets around the world are down 20%. And on top of that, the bond market is down anywhere from 10 to 20% around the world year-to-date because of rising interest rates.

Mike (01:30):

That’s usually your savior, isn’t it?

Rob (01:32):

It normally is. Normally the bonds are your defense, and unfortunately, the defense has sprung a leak. So I thought it might be good today to review the lifeboat drill. And what the lifeboat drill is, we’re going to look at the five biggest market corrections that have happened in the last 50 plus years. And I think it’s important to review them because they were equally bad for their own reasons, but what’s important to understand is what happens after you go through these periods.


So here’s the concept. We’re going to start with a million dollar portfolio, a nice round number, and we’re going to go with a balanced portfolio. 60% in stocks, invested around the world, and 40% in bonds. So pretty straightforward. We’re going to look at how that portfolio would’ve performed from the start of the market correction to the end. How big was the drop in percentage terms and dollar terms? And then what happened to it five years later, and 10 years later? So let’s get started on it.


Mike, what’s the first market correction that happened in this time period?

Mike (02:45):

First was 1973 and 1974. How old were you in ’73 and ’74?

Rob (02:51):

I would’ve been 12 or 13.

Mike (02:53):

Did it worry you?

Rob (02:54):

Not at all.

Mike (02:55):

Was your dad worried?

Rob (02:56):

He might have been, but I wasn’t aware of it. I wasn’t paying attention to whether my dad was worried or not.

Mike (03:02):

Yeah. You were more chasing girls in the school at that time.

Rob (03:05):

Well, maybe not even yet. But it was coming soon, I guess is the answer. So what were the instigators, Mike, to what happened at that time?

Mike (03:15):

Big thing was the oil crisis. So this is when OPEC really went and pulled the reins on everything and you saw a disastrous situation in oil. Reserves got pulled back, oil prices … I was in the states at this time. And at that time, they switched it so you could only get oil on … you could only fill your car with gas if you had an even license plate on certain days and odd on the other days. Because they were trying to just massively cut back on gas production.


You had the whole Nixon situation going. So Watergate was in the middle of having the president impeached. Which was just, politically, it’s almost … we went through all this with Trump. And back then this was actually a full impeachment that was going on. So that was big. Stagflation. And stagflation is when you have, basically prices stay pretty steady but pay goes down, so people end up with less money to buy goods. And it’s just an economy that just sits and does nothing at that time. So that was big. So that’s what was going on at the time.

Rob (04:16):

So you take your million dollars. How low did that million dollars drop, on paper, now?

Mike (04:22):

A million dollars went down by $249,000. Dropped to $750,316. So about a 25% drop.

Rob (04:32):

So today if we look at most investors around the world, they’re somewhere between 12 and, let’s say 18% down, depending on their asset mix. What would that million dollars be worth five years later if you did nothing? So the end of ’74.

Mike (04:51):

You fell asleep.

Rob (04:53):

You fell asleep, and so we’re waking up in 1979. But you stuck with the plan and you didn’t play with it, you just left it alone.

Mike (05:00):

The music has got much worse. But when you woke up in 1979, your portfolio would now be worth $2.488 million.

Rob (05:09):

So two and a half million dollars. So it’s gone from a million to two and a half million.

Mike (05:12):


Rob (05:13):

What about five years after that?

Mike (05:15):

At that point, you’d be $4.68 million.

Rob (05:18):

So 4.7.

Mike (05:20):


Rob (05:20):

So it’s almost doubled and redouble in that 10 year period.

Mike (05:24):


Rob (05:24):

From that, I would take that the strategy, when we’re going through a big crisis like 1973, ’74, is to stick with the plan?

Mike (05:33):


Rob (05:35):

I’m going to go to the next one, 1987. This was a short time period from August 1, 1987 to November 30th of ’87. So what’s interesting is it didn’t even go to the end of the year, but there was a period there for four or five months where things were really rough. And the first thing that happened was Black Monday. On October 19, 1987, so this is just a Monday, the stock market, the Dow Jones dropped 22% in the day. The S&P 500, which is … the Dow is 30 stocks. The S&P 500, it was down over 20% in that one day.


Your million dollars, during that time period that we looked at, between August and November, would’ve been down 121,000, or about 12%. And that’s where the bonds help to protect you a little bit, right? Because the stock market crashed, but the bond saved your day a little bit because interest rates were much higher in 1990. What about five years later, Mike? What would that million dollars be worth if you stuck with the plan?

Mike (06:47):

A little bit over 1.4 million.

Rob (06:50):

That’s pretty good. What about five years after that?

Mike (06:53):

About 2.9 million.

Rob (06:54):

So you got 50% right away in the next five years if you stuck with it, plus the recovery. And if you waited another five years after that, it doubled again.

Mike (07:06):

Yeah. And the worst thing about this, the Black Monday that happened, it put this plague over October. Everyone thinks October’s a terrible month to invest ever since Black Monday happened in October. For years, everyone said, I don’t want to invest in October. We looked at the research, it’s no different than any other month. It’s just that that one event happened in October. So everyone thinks every October since then is going to be a bad month.

Rob (07:25):

We better be careful, because it’s October 4th today. By the time this podcast comes out, it might be the seventh or eighth.

Mike (07:32):


Rob (07:34):

The middle of October isn’t far away. Let’s go to the next one.

Mike (07:37):

We go to 1990. 1990 was an odd year because it was one of the first times in a long time the US had gone to war. So remember, US went into Kuwait at that time. They were being supported by the UN, but they went in to invade Kuwait. And it was the war we got to watch on TV, so everyone was involved in it. I thought it was pretty interesting, because the big thing about 1990 was we went from, at that time Reagan was out and George Bush Sr. was in. And after this war, George Bush Sr. was a hero, right? He came out and they won this war very quickly and easily. But within two years, he didn’t get reelected and that was because the economy turned on him.


And that’s what we saw in 1990. End of the real estate boom. We had the Gulf War going on. Real estate was a big factor too. Again, rising interest rates. Over-exuberant people going into real estate previously, had created a bit of a bubble in the real estate market. And when that came down, it did some damage.

Rob (08:35):

So just to show that life goes on, 1990 was also the year I got married and my wife and I bought our first house together. So you can imagine what that was like, going through 1990. So what happened to the million dollars?

Mike (08:52):

End of the year, it was worth about 946.

Rob (08:53):

Okay. So that’s not too bad.

Mike (08:56):

Not a terrible drop, 5% or so. So it was down, but it wasn’t one of the worst years we’ve seen.

Rob (09:04):

What about five years later? How’s that million dollars doing again?

Mike (09:07):

It came back very well. It was worth about 1.69 million.

Rob (09:11):

And five years after that?

Mike (09:12):

Then we were worth about 3.1 million. A little bit over that, 3.154 million.

Rob (09:16):

So it almost doubled again.

Mike (09:18):


Rob (09:19):

What’s interesting is during that time period, how bad was this oil price shock? Well, the oil went from $17 a barrel to $36 a barrel. Now, that seems pretty cheap compared to where we are now, but again, that was more than the doubling of the price of oil. You can imagine what was going on at the gas stations then, the lineups and people weren’t using their car as much. There was a lot going on in the world at the time.

Mike (09:46):

Oil prices sometimes get very misunderstood. People think of oil prices as what they’re paying for gas. You got to remember, at one point about two years ago, the oil price hit zero, right? They actually went to zero. And it’s funny, it’s going to be one of these weird points in time where you look back, but basically the futures on oil, it would cost them more money to store the oil than they thought it would be worth in the future. That can happen with oil prices. And then we went over to $100 a barrel. And now we’re we’re floating somewhere in the 80s, depends on whenever this podcast comes out.

Rob (10:16):

So the next time period was from April 1, 2000 to March 31, 2002. During that time period, we had the aftermath of 9/11, which happened in 2001. We had that tech bubble burst, the first real burst of the tech boom. So the tech boom went on in 1999 and 1998. All the tech stocks drove. The internet was a new thing. It was exciting and all these companies were going to take advantage of it. Companies we had never heard of were worth millions and millions and billions of dollars, in some cases.


We then had the accounting scandals that were happening. All the big accounting firms were caught, basically cheating. Basically cooking the books for their clients.

Mike (11:02):

That was the Enron era, wasn’t it?

Rob (11:04):

It was.

Mike (11:05):

Nortel, Enron, all these big companies with false reports.

Rob (11:09):

So what happens to the million dollars? Well, it drops to 882,000, or down about $117,000. On paper, you’d be down about 12%. Because again, you’re in this balanced portfolio which holds it together. We’re not looking at an all equity portfolio, we’re looking at a balanced portfolio. Five years later, that million dollars is up to a million, five. And five years after that, it’s a million seven.


Again, not quite doubling in value. And the reason it didn’t double in value is interesting. Because before that 10 year market, we had another correction.

Mike (11:47):

Yeah. The other thing I find interesting when I look back on these numbers on 2000 and 2002, 2003, when you look at back the damage, it felt much worse because we lived through that. We were full financial advisors at that time. But the one thing this doesn’t really … this shows you’re the overall average of everyone. It doesn’t really go into how many people got overexposed to tech, and didn’t lose 12%. They lost 90%.


And we saw that right across the board. There was a bunch of people that got caught up in this whole tech boom and they lost most of their net worth. So this is one of the advantages when we look at this balanced portfolio, this was a really good scenario compared to where a lot of individuals who got over zealous in the high tech sector got.

Rob (12:31):

It also doesn’t include leverage. And if you remember in 1999, 2000, there was a lot of leverage being used. Even more recently, a lot of people were leveraged on Bitcoin. They went out and borrowed money because they thought it was such a sure thing. And it’s down, to date, I guess, 69% year-to-date.

Mike (12:52):

Yeah. If you’re down 12% and you leveraged to get there, you’re down 24%, depending on the leverage you used.

Rob (12:57):

So let’s go through what happened 2007 to 2009. Mike, walk us through that. What were the major events that took place?

Mike (13:05):

Well, this was, we all call it the Financial Crisis now. Subprime mortgage was just a disaster. Banking and credit crisis. So it started, we saw Lehman Brothers, Bear Stearns, all these different companies that were the foundations of Wall Street for all these … for some of them, centuries. And they were just falling apart. We watched people walking out of the office with boxes.


And it was just that there was a lot of money going in this subprime mortgage market. And people were trying to ensure mortgages, sell them as different products, and it just created tons of problems. No one knew really what was going on. And then all of a sudden, the bottom fell out of the real estate. It worked out really well when the real estate market kept on growing at 20, 30% a year. As soon as that stopped … what did Warren Buffet say? He always can see who’s swimming naked when the tide goes out.

Rob (13:56):


Mike (13:57):

That’s essentially what we saw here.

Rob (13:59):

So what’s the damage on the million dollars? We started with a million dollars, and in June 2007. What did it look by the time we got to February 2009? And that’s a relatively long correction period too.

Mike (14:10):

Yeah. I mean, we’re going back to 1929 territory. It was down about $204,000. So your million dollars was now worth under 800,000.

Rob (14:20):

Five years later, what did it grow to?

Mike (14:22):

Five years later … it took a while to come back, because this was some major damage. But you still ended up with about 1.116 million after five years. So you did recover, but it was a long recovery.

Rob (14:33):

And five years after that?

Mike (14:35):

Worth about 1.742 million.

Rob (14:38):

So it’s interesting when you put all this … you walk through it. You can look at the numbers. If you don’t like numbers, there’s graphs that you can look at that basically show the same thing. And the market is very resilient. We go through these corrections, and it’s just the way the market works. It’s how humans are wired. When the news is all bad, they get scared and everybody gets scared at the same time. And then, somehow the news starts to improve even a little bit, and people get excited again. And the market starts going up.

Mike (15:12):

I’ll give credit to our clients. Our clients now are much better than they were 20 years ago. We have received very few calls about the market corrections. People seem to understand how things work. And I like to think it was education right across the entire world of investors. But we look at the numbers going in and out of mutual funds, it isn’t the case. Because we can see money leaving equity funds and going into fixed cash.

Rob (15:34):

Cash. And GICs.

Mike (15:35):

… and all these areas. So obviously the entire world hasn’t learned. We’re very proud that our client base has actually learned to do things the right way. But it wasn’t always like that either.

Rob (15:43):

Do you think it has to do with our gray hair?

Mike (15:47):

I got enough of it. I think, along the line, we’ve put education in the forefront of everything. That’s why we’ve always had seminars. We do these podcasts, we have John and Carlo doing Ask TMFG. I think all this stuff is to educate our clients so they understand what’s going on. It makes them better investors and will make them wealthier in the future, and leave them more money to pass on to their heirs later on. So I think it’s a good thing for everyone.

Rob (16:11):

Agreed. That brings us to the end of another week. This is Rob and Mike with ThinkSmart, from The McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.

Assante Capital Management (16:24):

You’ve been listening to The McClelland Financial Group of Assante Capital Management Ltd. Assante Capital Management Ltd is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate and Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Ltd.


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