On September 15, 2008, Lehman Brothers filed for bankruptcy.

It remains the largest bankruptcy filing in U.S. history, bringing a 158-year-old institution to an abrupt end.

Within two weeks, AIG needed an emergency Fed bailout, and Washington Mutual became the largest bank failure in U.S. history.

If you were investing back then, you probably remember how it felt.

18 years later, what happened next is worth remembering, too.

In today's email:

• How bad things got, and how long the bad news lasted
• Why the market turned long before the headlines did
• How to prepare for the next bear market, financially and mentally

As always, I'll wrap up with a few of the best retirement and investing articles I read in the past week.

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Before we dive in, did you catch this week's podcast? 👇

The Worst Decline Since the Great Depression

When Lehman failed, the S&P 500 was already down 24% from its October 2007 peak.

The decline was just getting started...

Daily swings of 4% to 5% became common, and by March 9, 2009, stocks had fallen another 43%, bringing the peak-to-trough decline to nearly 57%.

It remains the worst decline since the Great Depression.

The News Kept Getting Worse

The market bottomed in March 2009, but nobody knew it at the time.

For months afterward, the headlines suggested the worst was still ahead:

• Unemployment didn't peak until October 2009, at 10%, the highest since 1983.
• Mortgage delinquencies (90+ days) hit an all-time high above 5% in late 2009.
• Foreclosures didn't peak until late 2010.
• Bank failures jumped from 25 in 2008 to 140 in 2009, then 157 more in 2010.
• Inflation turned negative. By July 2009, prices were 2.1% lower than a year earlier, sparking fears of Japan-style deflation.

The Market Knew First

From its closing low of 676, the S&P 500 went on a tear.

By the time unemployment peaked in October, it was already up more than 50%. By year-end, it was up more than 60%.

Somehow, the market figured out that everything would be okay long before the rest of us did.

Today, the S&P 500 sits at roughly 11 times its March 2009 low, and that's before counting dividends.

Two Reminders From the Darkest Days

Reminder #1: Every crisis ends.

A crisis arrives, panic sets in, and markets fall.

Then, at some point, the headlines improve and markets begin to recover. Eventually, the fear fades too, often in that order.

Every crisis is different, and history offers no guarantees. But so far, every one has ended.

Every. Single. One.

Reminder #2: Bear markets are normal.

Since 1945, the S&P 500 has entered a bear market about once every five years, according to Hartford Funds and Ned Davis Research.

On average, those bear markets have lasted about 9.6 months and declined 35%.

That means a 30-year retirement could easily include five or six of them.

After a few strong years, it’s easy to forget what that feels like. But another bear market will come, we just don’t know when.

How to Prepare for the Next One

The best time to prepare for a bear market is before it arrives.

Financially, that means:

• Keeping a war chest of two to three years of spending in cash and short-term bonds, so you’re not forced to sell stocks during a downturn.
• Having a plan to play offense. Rebalancing into stocks, harvesting losses in taxable accounts, and completing Roth conversions at lower account values can create valuable planning opportunities when markets fall.

Mentally, it means deciding ahead of time how you’ll respond when fear takes over.

That matters because some of the market’s strongest days tend to arrive when the news still feels terrible.

In fact, about ​42%​ of the S&P 500’s best days over the past 20 years occurred during bear markets. Another ​36%​ came during the first two months of a new bull market.

Missing those early recovery days can be costly, which is why having a plan before emotions take over matters so much.

Bottom Line

September 2008 felt like the financial system was coming apart.

And yet the market eventually turned while the headlines were still terrible and the outlook still felt deeply uncertain.

That’s what makes bear markets so difficult. The recovery rarely waits for the news to feel safe again.

The next one will feel scary in real time, too.

But if you prepare your portfolio, your cash reserves, and your decision-making process in advance, you’ll be in a much better position to stay disciplined and take advantage of the opportunities that falling markets can create.

📚 What I've Been Reading

A huge congrats to my good friend Peter Lazaroff on the release of his new book, The Perfect Portfolio.

Peter does a fantastic job breaking down how to build a disciplined, diversified portfolio that fits your goals and is designed to hold up through whatever the markets throw at you.

If you want a smarter, more sustainable approach to investing, grab a copy of The Perfect Portfolio here.

***

• Should Charitable Taxpayers Donate Directly from an IRA or Donate Appreciated Securities? (FPA Journal)
• The New QCD Reporting Rule Raises a Big Question for IRA Owners (Morningstar)
• Why I Refuse to Pick Individual Stocks (The Purpose Code)
• You're Not Going to Have the Same Energy Every Day (Darius Foroux)
• Five Insights for Creating a Midlife You Love (The Next Big Idea)

Thank you for reading!

Please reply to this email with comments, questions, and/or feedback.

Stay wealthy,

Taylor Schulte, CFP®