244) Global Financial Crisis Effect on Equity & Bond Funds

244) Global Financial Crisis Effect on Equity & Bond Funds

Do you know what happened to the Stock Market and Bonds during the Global Financial Crisis (GFC) started from the USA Sub Prime Problem from Jan to Oct 2008? 

Do you wonder what happened to the markets after the Crisis was over?

Let's look at the details to learn lessons from the past.

Below is an example of Equity fund and the benchmark KLCI performance during GFC.

The GFC crisis happened from 11 Jan to 29 Oct 2008 for 292 days (around 10 months).
The Equity Fund dropped 45%, while KLCI also dropped 45%.

Now, let's look at the graph below of same fund after the crisis was over.

After the GFC crisis, the stock market increased from 29 Oct 2008 to 8 Jul 2011 for 982 days (2.7 years). The same Equity Fund increased 126%, while KLCI increased 92%.

Now, let's look at the graph below of combined total period from 11 Jan 2008 to 8 Jul 2011. It was the period of GFC start to end of the market growth.

The Equity fund dropped, rebound back and still gave 24% total returns, while KLCI gave only 5%.

Now, let's compare the performance of a Bond Fund.

During the GFC crisis, the Bond Fund also dropped 0.7%, while the 12 Months Fixed Deposit value increased 3%. Bond funds were affected by Foreign outflows and depreciation of the Local Currency.

Click here for more reading on factors that affect bond prices.

https://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

Now, let's look at the graph below of same fund after the GFC Crisis was over.

After the GFC crisis, the Bond Fund start to give positive returns 22%, while the 12 Months Fixed Deposit value increased another 7.7%.

Now, let's look at the graph below of combined total period from 11 Jan 2008 to 8 Jul 2011. It was the period of GFC start to end of the market growth.

The Bond Fund total increased 21.7%, while the 12 Months Fixed Deposit value increased 10.8%.

Comparison:

1) During GFC Crisis, the Equity Fund dropped 45%, while the Bond Fund dropped 0.7%.

2) After GFC Crisis, the Equity Fund increased 126%, while the Bond Fund increased only another 22%. The Equity Fund gave much higher returns than Bond Fund. An Investor who had invested at the lowest point would have made a very good return.

3) During & after GFC Crisis, the Equity Fund increased 24%, while the Bond Fund increased 10%. An investor that had bought just before GFC, stay invested until the Crisis was over and continued to stay invested would still made a some returns.

4) The Bond Fund continued to increase in value with more stable performance while the Equity Fund was more volatile with bigger ups and downs.

5) During Financial Crisis, Bond Funds are affected more than during virus crisis.

Conclusion:

1) Stay Invested for the Long Term until your financial objective is achieved.
2) Understand that Equity Fund is more volatile, so stay calm.
3) Equity Fund has Higher Volatility (Risk) vs Bond Fund. However, higher Risk gives higher Returns in the long term.
4) Diversify your portfolio to balance the Risk and Returns.


For more related articles:

246) Europe Debt Crisis Effect on Equity & Bond Funds

https://highlevelrules.blogspot.com/2020/04/246-europe-debt-crisis-effect-on-equity.html

242) SARS Crisis Effect on Equity & Bond Funds

https://highlevelrules.blogspot.com/2020/03/242-sars-crisis-effect-on-equity-bond.html

241) Factors Affect Bond Prices

https://highlevelrules.blogspot.com/2020/03/241-factors-affect-bond-prices.html

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http://highlevelrules.blogspot.com/2018/07/trader-vs-investor.html


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http://highlevelrules.blogspot.com/2017/10/time-in-vs-timing-market_24.html


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http://highlevelrules.blogspot.com/2018/08/price-top-bottom-cycle.html