Lessons from the Great Financial Crisis

Welp, I guess we’re all headed into a recession now.

It doesn’t matter whether you’re rich, poor, a leftie or a right-winger, Canadian, European, Chinese, or American. Stock markets around the world are all in free fall and we all know why.

And through it all, I feel an odd sense of familiarity. Like I’d been here before. The daily back-to-back 1000+ point drops, the panicky talking heads on the news, the dire predictions of the end of Western civilization as we know it. And that’s when it hit me.

This feels exactly like 2008.

There’s an old saying that everyone feels like an investing genius when stock markets are rampaging higher. But when stock markets tank, that’s when you find out who’s actually a good investor.

But I’m not here to tell you to suck it up and ignore the headlines. The headlines are real, and it’s natural to be scared right now. What I can tell you is what I learned from dealing with the last Great Financial Crisis, and tell you how I got through that last round of bullshit. Hopefully that will help.

Stay Invested

When markets are crashing like this, it’s really tempting to sell everything and move to cash until the dust settles. I remember vividly holding a finger over the “Sell All” button of my brokerage account and trying my hardest not to push that button. My head told me not to, but the fear was screaming at me to do it. In the end, my head won out, and I didn’t push it. And thank goodness I didn’t, because I never would have become a millionaire if I had run screaming for the hills the first time a financial crisis hit.

The problem with trying to dance in and out of the market is that it’s obvious when to get out, but not obvious when to get back in. Markets always recover, but nobody can predict when. The recovery can happen when governments get their act together and start acting decisively to rescue the economy. But it can also happen when a totally random geopolitical event or natural disaster forces the government’s hand, and those black swan events are, by definition, impossible to see coming.

Stay Globally Diversified

Investors have been getting way too comfortable lately with a 100% equity, 100% USA stock market allocation. I get it, the past few years have seen excellent double-digit returns on the S&P 500 driven by advancements in AI, and I’ve heard from multiple people questioning why they should bother with investing in other regions of the world.

Well, this is why.

This crisis, like 2008, is 100% US-created. While other economies like Canada, Europe, or the UK only have one big issue to deal with (i.e. the US tariffing them), by declaring a trade war with the entire world, the US will be nailed with the effects of the largest domestic tax hike since 1968, but they’ll have to contend with retaliatory tariffs from everyone they’ve pissed off.

Canada has already announced retaliatory tariffs, and so has China. The EU is preparing their own set of retaliatory tariffs, and they won’t be the last.

As a result, the US has led the way…in losses.

There are two basic ways out of this tariff war. One, the US sees the error of their ways and drops their tariffs. The other is that the US sticks to their guns and keeps the tariffs on permanently, in which case the rest of the world will eventually cut out the US from their trade relationships and just trade with each other.

In both cases, international stock market exposure is going to be key to the recovery. So far, it’s acted as a buffer, outperforming the US index by 13%, and it could potentially lead the way back up, when the recovery eventually happens.

Negotiate Your Rent

I’d like to address all the fellow renters reading this blog right now. Now is not the time to be afraid. You’re in a much better position than homeowners shouldering a mountain of debt.

In both the 2008 crash and the pandemic, recessions were coupled with drops in rental prices as landlords starting hemorrhaging money. We’re already seeing rents starting to drop in major cities now, and these forces are likely to continue as this recession takes hold.

The last time we were in this boat (2020), we were able to jump from rental to rental, and ride the market lower. Being nomadic helps, but even if you don’t want to move you can use it as a bargaining chip to negotiate with your landlord.

FIRECracker will be writing an article about how to do this.

Stay Out Of Debt

In every major financial crisis, the people with giant mortgages are the first to get screwed. Especially if they’ve put themselves into a situation where both spouses need to be working to afford the debt payments. Then with one (or both) people get laid off, their finances collapse like a house of cards and they lose everything.

Don’t be like those people. Now is not the time to buy a house.

Fill Up Your Cash Buckets

They say that in a recession, cash is king, and this time is no different.

Now’s the time to make sure that you have 6 months to a year of emergency savings sitting in a savings account. You can put this money into a high-interest savings account, or buy a money market ETF in your brokerage account, but keep this money as liquid and accessible as possible. Job losses are already starting to mount, and who knows how long this will last.

Keep Buying Into the Storm (If You’re Accumulating)

Most of our readers are, statistically, working towards FIRE, meaning they’re in the accumulation phase of their FIRE journey.

If your job seems unstable, or could potentially be affected by these tariffs, definitely build up your cash cushion first. That’s your first priority.

After that’s done, it’s important that you keep buying into the market, even when everything’s falling.

It’s definitely easier said than done. I distinctly remember taking $1000 off my paycheck and putting it towards my index funds, only to have the market tank the next day, erasing more than $1000 from my overall portfolio’s market value.

“What did I just do?” I thought. It felt like I was literally setting money on fire. But what was happening was that I was picking up ETF units at a discount, and when the inevitable recovery happened, we were able to participate in the upside stronger than the downside.

From 2008 to about March 2009, stock markets halved in value, and began their long road to recovery, eventually reaching their pre-crisis level around 2013. However, because we bought as prices were tanking, we hit our break-even point around December 2010, a full 3 years before the rest of the market caught up.

This was the hardest part of investing during a stock market crash, I’m not going to lie. Every fibre of your being will fight you as you continue to shovel money into what seems like a flaming dumpster fire. But you have to remember, this is not the same as gambling, because index funds can’t go to 0. That would require every company in the index to go bankrupt, and while some may because of this tariff war, not all of them will.

The world economy will ultimately survive and start growing again at some point in the future, and that’s what you’re betting on.

Fill Up Your Cash Buckets (if you’re retired)

And for those of our readers who are in the final stages of your FIRE journey, or even already retired, it’s important to keep some cash handy as well.

The 4% rule states that if you withdraw 4% of your starting portfolio, and adjust your withdrawals according to inflation, you have a 95% chance of your portfolio surviving throughout a 30-year retirement. That still leaves a 5% chance of failure, and this is called sequence of returns risk.

We’ve written extensively about sequence of returns risk, but to recap, if you start your retirement during an exceptionally bad period of stock market returns, there’s a chance you could run out of money because you’d be forced to sell as the market drops.

To hedge this risk, we proposed a strategy in our book Quit Like a Millionaire called the Cash Cushion strategy. Basically, this means keeping enough cash outside your portfolio sitting in a savings account (or invested in a money market ETF) to prevent having to withdraw from your portfolio in a down market.

To figure out the size of the Cash Cushion you need, take your projected living expenses (E) and subtract the annual yield of your portfolio (Y). This is how much cash is needed to survive a downturn for a year without selling any assets. In our book, we recommend keeping 3 times this amount handy in your Cash Cushion so you can survive 3 years of recession without drawing anything down.

So, for example, if your annual living expenses were $40,000 and your portfolio was yielding $30,000, then your Cash Cushion target would be ($40,000 – $30,000) x 3 = $30,000.

Conclusion

Things were going so well, with the last administration delivering record breaking stock markets, low unemployment, and well-controlled inflation. But the American government has decided to drag the world kicking and screaming into a recession.

But it’s in these dire times that separate the real investors from the bandwagon-jumpers. Can you watch as stock markets are falling and still do the right thing for your portfolio, or will you lose your nerve and let fear guide your actions?

I guess we’re all about to find out.

How are you managing during this time of crisis? Let’s hear it in the comments below!

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