5 Years Since The GFC

Its been approximately Five (5) years since the GFC and whilst I'm looking at bench-marking my future share portfolio against the ASX All Ordinaries Accumulation Index, I also wondered how I'd fared in the last 5 years since the GFC

The credit crunch

The global financial crisis (GFC) or global economic crisis is commonly believed to have begun in July 2007 with the credit crunch, when a loss of confidence by US investors in the value of sub-prime mortgages caused a liquidity crisis. This, in turn, resulted in the US Federal Bank injecting a large amount of capital into financial markets. By September 2008, the crisis had worsened as stock markets around the globe crashed and became highly volatile. Consumer confidence hit rock bottom as everyone tightened their belts in fear of what could lie ahead.

The sub-prime crisis and housing bubble

The housing market in the United States suffered greatly as many home owners who had taken out sub-prime loans found they were unable to meet their mortgage repayments. As the value of homes plummeted, the borrowers found themselves with negative equity. With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worth less on today's market than the bank had loaned out originally. The banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst. This is commonly referred to as the credit crunch.

The global financial crisis enters a new phase

The collapse of Lehman Brothers on September 14, 2008 marked the beginning of a new phase in the global financial crisis. Governments around the world struggled to rescue giant financial institutions as the fallout from the housing and stock market collapse worsened. Many financial institutions continued to face serious liquidity issues.

Australia's response to the global financial crisis - the first stimulus package

Australian prime minister Kevin Rudd and Treasurer Wayne Swan delivered their first budget in response to the global financial crisis, with the main objective being to fight inflation - a major problem in the local economy at the time.

In October 2008 the Rudd government announced that it would guarantee bank deposits. With the economy facing a recession, an economic stimulus package worth $10.4 billion was announced. This included payments to seniors, carers and families. The payment were made in December 2008, just in time for Christmas spending, and retailers predominantly reported strong sales. The first home buyer's grant was doubled to $14,000 for existing homes, and tripled to $21,000 for new homes.

The automotive industry was also given a helping hand, as several major lenders had withdrawn from the market completely, leaving banks to fill the gaps in lending.

The crisis continues - a second stimulus package is announced

A second, even larger economic stimulus package was announced by the Australian government in February 2009. $47 billion was allocated to help boost the economy:

Source
 
It's interesting to look back

9 August 2007. 15 September 2008. 2 April 2009. 9 May 2010. 5 August 2011. From sub-prime to downgrade, the five stages of the most serious crisis to hit the global economy since the Great Depression can be found in those dates.

It took a year for the financial crisis to come to a head but it did so on 15 September 2008 when the US government allowed the investment bank Lehman Brothers to go bankrupt. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock.

When Lehman Brothers went down, the notion that all banks were "too big to fail" no longer held true, with the result that every bank was deemed to be risky. Within a month, the threat of a domino effect through the global financial system forced western governments to inject vast sums of capital into their banks to prevent them collapsing. The banks were rescued in the nick of time, but it was too late to prevent the global economy from going into freefall. Credit flows to the private sector were choked off at the same time as consumer and business confidence collapsed. All this came after a period when high oil prices had persuaded central banks that the priority was to keep interest rates high as a bulwark against inflation rather than to cut them in anticipation of the financial crisis spreading to the real economy.

Source
 
And from an earlier post

Interesting to look back at the S&P/ASX 200 accumulation index

30 June...Index Value...Yield
2011......34,201..........11.73%
2010......30,610..........13.14%
2009......27,054..........-20.14%
2008......33,875..........-13.41%
2007......39,119..........28.66%
2006......30,405..........23.93%
2005......24,534..........26.35%
2004......19,417..........21.61%
2003......15,967..........-1.71%
2002......16,245..........-4.69%
2001......17,045..........9.07%
2000......15,628..........15.51%
1999......13,530..........15.34%
1998......11,731..........1.65%
1997......11,541..........26.56%
1996......9,119............15.83%
1995......7,873............5.71%
1994......7,448............18.47%
1993......6,287............9.91%
1992......5,720............13.33%
1991......5,047............5.87%
1990......4,767............4.08%
1989......4,580............3.53%
1988......4,424............-8.61%
1987......4,841............54.02%
1986......3,143............42.48%
1985......2,206............36.51%
1984......1,616............13.48%
1983......1,424............34.72%
1982......1,057............-29.06%
1981......1,490............15.77%
1980......1,287............nil

The data doesn't seem to be freely available anywhere over longer time-frames than say Bloomberg, so you have to rely on 3rd parties posting results?

Ref

Whats that as a compounded annual growth rate from 1981 to 2011 (30 years) approx 11.1%

Now to work out the last five years :D
 
Well, 2012 would need to print at ~14.397% (positive) in order to recoup losses from 08-09. If you factor in capital erosion due to inflation then another ~15-25% on top that is required to just break even....assuming 3-5% inflation, with compounding on top of that!

So, the GFC hurdle still hasn't been cleared and I doubt it will be for a few years yet as we still need over a 30% upswing to get back to early 2008 capital values in real terms. Potentially as high as 40-50% depending on your inflation figure... headline or core inflation. ;) Headline is what I prefer to use as it represents my real purchasing power, but runs at about double core inflation figures.
 
It makes you think about retirement and share market risk as part of your planning strategy

Those that retired pre-GFC and parked their funds somewhere safe, probably did okay.

Then there were probably those looking to retire, that had a large exposure to the stock markets and were doing pretty well, but had the wind knocked out of their sails when the GFC hit. Maybe they sold out as the markets fell and still retired, maybe they panicked and sold out at, or near the bottom as retirement loomed, maybe they continued to work and put retirement off a few years, either way adjusting your risk profile with regards to the stock market as you age seems to have merit
 
Having a look at 2010-2011 the return was 13.5%, but then when I take out the effect of personal contributions it was only 2.82%

On that note how do the super funds report their annual performance and by what criteria?

example

Top 10 Balanced (60-76) – annual returns for 5 years as at 30 June 2011

CBA OSF Super – Mix 70 Balanced (60-76) 4.9%
REST – Core Strategy Balanced (60-76) 4.6%
Catholic Super – Balanced Balanced (60-76) 4.3%
 
Interesting summary redwing, thanks.

We are now in a policy driven recovery, where central bankers and governments are creating more debt or distributing existing loads differently in order to plug the holes in a debt laden global economy which wants to sink.

It's only a matter of time before the crises escalates again or manifests in other ways (e.g. very high inflation to reduce debt burden). Prepared accordingly :cool:
 
It makes you think about retirement and share market risk as part of your planning strategy

Those that retired pre-GFC and parked their funds somewhere safe, probably did okay.

Then there were probably those looking to retire, that had a large exposure to the stock markets and were doing pretty well, but had the wind knocked out of their sails when the GFC hit. Maybe they sold out as the markets fell and still retired, maybe they panicked and sold out at, or near the bottom as retirement loomed, maybe they continued to work and put retirement off a few years, either way adjusting your risk profile with regards to the stock market as you age seems to have merit


May be there were some people who loaded up on stocks at or around the lows...doubled and in may cases tripled their money within the next 18 months and set themselves up for retirement.

A poster called Intrinsic_Value had exactly done this.

There is a lesson to be learnt. People who bought at or around the bottom bought when the risk of losing money was the lowest and the possible returns highest. While those who bought at the top bought with the highest risk of losing money and the lowest potential returns.

Cheers,
Oracle.
 
Haven't seen IV around here for a while - wonder what he's (?) doing? Probably cruising around the Mediterranean on a large yacht!
 
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