The global economy breathes and moves. Usually it goes slowly upwards, but sometimes something dramatic happens that makes the whole system shake. We call this a financial crisis. It is as if everyone in a crowded cinema suddenly tries to run for the same emergency exit at the same time - panic ensues, and there is not room for everyone.
"What happens in the external is a reflection of what has gone on in the internal. Fear is only faith in evil instead of good."
— Florence Scovel Shinn
Many financial crises start with what we call a bubble. This happens when the price of something - for example real estate or technology stocks - rises far beyond what is reasonable, just because everyone believes the price will continue to rise forever. When people suddenly realize the value is not correct, everyone starts selling at the same time.
Famous historical crises
- The crash of 1929: Started on Wall Street and led to the Great Depression of the 1930s.
- The Dot-com bubble (2000): When every company with dot-com in its name was priced astronomically high before it all crashed.
- The financial crisis of 2008: Triggered by subprime mortgages in the US, which almost caused the entire global banking system to collapse.
Contagion effect: A financial crisis rarely stops where it started. Because banks and countries lend money to each other across borders, a housing crash in the US can lead to a factory in Norway having to lay off employees a few weeks later. Everything is connected.
How to protect yourself?
Strategies for survival
- Keep a solid buffer account with cash, so you do not have to sell stocks when they are at the bottom.
- Ensure good diversification in your portfolio; do not put all your eggs in one basket.
- Remember that historically the market has always recovered and reached new heights after a crisis.
Opportunities in the crisis
- For the long-term investor, a financial crisis is often the biggest sale on the stock market.
- When everyone else panics and sells in fear, you can buy solid companies at a very low price.
- As Warren Buffett says: Be fearful when others are greedy, and greedy when others are fearful.