Protect Your Retirement from the Next Crash
Three recommendations from a noted financial planner
(This article appeared previously on Marketwatch.)
The market has been setting all-time highs — it's up almost 200 percent since the lows of March 2009. Over three quarters of companies (77 percent) have reported earnings that beat estimates. We can look forward to the market rise that historically occurs after midterm elections; I think we're on track to see 18,000 on the Dow Jones Industrial Average.
While the market seems to be on a positive track, retirees should be concerned by how similar current circumstances are to what happened during the Great Depression. These similarities could be a harbinger of danger to their retirement plans.
Market Crashes Then and Now
Looking back at history, we can see that before the stock market crash of 1929, real estate values were going crazy. Banks were using money from their depositors to finance deals. The same sort of things that caused the 2008 credit crisis triggered the stock market crash of 1929.
We had a huge market drop both times. In 2008, the market dropped 57 percent. That's a severe drop, until you consider that the market plunged 92 percent in 1929. And that, of course, was the beginning of the Great Depression.
When Franklin Delano Roosevelt became president in 1933, what did he do? He enacted government stimulus programs to help the economy and get us out of the depression. Fast forward to 2008. What did the government do to get us out of the great recession? Massive government stimulus. The U.S. borrowed $3 trillion dollars to pump into the economy. The Federal Reserve is keeping interest rates artificially low. We're setting records in regard to government stimulus.
Back in 1933, FDR's government stimulus plan seemed to work. Profits picked up and the economy rebounded. Over the next four years, the market went up 200 percent. Does this sound familiar?
Today, all of our current government spending, all the cheap money, all the free stuff that helped pull us out of the recession has driven the market up, yes, 200 percent.
But if you build a house of cards, it doesn't take much to make it fall. Just a little breeze can make the whole thing come crashing down. That's what happened in 1937. The market went into a tailspin. The government stimulus was just creating a facade and it crumbled: From 1937 through 1939, the stock market went down 42 percent.
A Warning for Today?
I find the correlations between the Great Depression and the Great Recession very concerning, and I think we're setting up for the same sort of aftershock we saw back then.
Ken Moraif, CFP, is a senior advisor at Money Matters, a Dallas-based wealth management and investment firm. The firm works with pre-retirees and retirees, offering estate and tax planning services, retirement plan consulting, and investment management. He covers retirement trends in his weekly radio show, “Money Matters with Ken Moraif.” You can follow Ken on Twitter: @KenMoraif or Facebook.