The 2008 and 2020 Thought Experiments
The 2008 and 2020 Thought Experiments
Your risk tolerance is not what you write on a form. It is what you do when your portfolio is down 30% in real time, live news anchors are panic-shouting, and your partner is asking whether you should "get out." The 2008 and 2020 crashes offer two vivid experiments in what tolerance actually means—and how your behavior differs from your beliefs.
Key takeaways
- In 2008, stocks fell 57% and a 60/40 portfolio fell 24% over 17 months, causing widespread panic and selling.
- In 2020, stocks fell 34% in 34 days, then recovered fully in 4 months, testing your willingness to hold through rapid drawdown.
- People who sold in March 2009 (after 12 months of losses) watched stocks triple from the bottom; this time lag reveals that tolerance is about duration as much as size.
- Thought experiments—simulating real decisions in 2008 and 2020 scenarios—are more honest than hypothetical questionnaires.
- Your true tolerance is revealed by whether you would hold in both scenarios or panic in one; that difference should inform your allocation now.
The 2008 experiment: pain, duration, and capitulation
Picture yourself on October 1, 2008. You have $500,000 in a 60/40 portfolio. By mid-September 2008, you're down 17%. You check your statements and see you've lost $85,000. Your partner is worried. Your friends are talking about selling. TV anchors are predicting that Lehman Brothers' collapse will trigger a new Great Depression.
By November 2008, you're down 24%. You've lost $120,000. You've now watched your portfolio decline for six months straight. No recovery in sight. People you know are asking whether "the stock market is over." In January 2009, the losses deepen. You're down 26% with no bottom in sight. The duration—17 months of sustained losses—is psychologically crushing.
By March 2009, you've lost 24% total. The worst is behind you, but you don't know it. You do know that you have lost $120,000, your stocks are worth 40% less than two years ago, bonds have stopped helping, and every respected voice on television is either predicting further disaster or staying silent.
Now make a decision: Do you sell 50% of your stocks and move to cash? You've heard from people who sold in March 2008 and preserved capital. Or do you hold?
Most people who lived through 2008 as investors did one of two things. Some held. They felt pain from October 2008 to March 2009, but they held. When recovery began in April 2009, they benefited from it. By 2010, they were whole. By 2015, they were significantly ahead.
Others sold. Many sold between January and March 2009 when fear peaked. They preserved their remaining capital at $390,000 (down 22% instead of 24%). But they missed the recovery. The 2009 rebound was 26% (stocks). By 2010, they were still holding depressed cash and they'd missed the entire rally. By 2015, they were behind people who held through 2009 by several hundred thousand dollars.
The data shows that selling in 2009 was the worst decision investors made. Yet over half the retail portfolios did something close to it. That gap—between what you say you'll do and what you do when pain peaks—is your real tolerance.
The 2020 experiment: speed and confidence
Now picture October 2019. You have $500,000 in a 70/30 portfolio (70% stocks via VTI, 30% bonds via BND). Markets are at all-time highs. You feel fine.
February 19, 2020: Stocks peak. Everything is normal.
February 24, 2020: A sharp down day. Stock market down 3.5% in a single session.
February 28, 2020: Stocks down 9% in one week. Your portfolio is down 6.3% in real time. You've lost $31,500 in nine trading days.
March 9, 2020: Stocks down 19% from the peak. Your portfolio is down 13.3%. You've lost $66,500 in three weeks. It's the fastest decline in history except for 1987. News is chaotic. The word "pandemic" is being used. People are hoarding groceries.
March 16, 2020: Stocks down 25% from the peak. Your portfolio is down 17.5%. You've lost $87,500. Your workplace is telling you to work from home. Markets are still in free fall.
March 23, 2020: Stocks down 34% from the peak (absolute trough). Your portfolio is down 23.8%. You've lost $119,000. The VIX (volatility index) is at 85, a level seen only in 1987 and 2008. Many people are buying supplies. The first stimulus bill is being debated.
Decision point: Do you hold, or do you move to cash?
Unlike 2008, there's a crucial difference: the drawdown is fast but shallow. A 34% stock loss is severe. But it happened in 34 days, not 17 months. By April 2020, signs of recovery were visible. The Federal Reserve had stepped in decisively. By May 2020, stocks were up 15% from the trough. By August, the S&P 500 was at all-time highs.
The people who held through March 23, 2020 experienced a 23.8% loss on their 70/30 portfolio. But they recovered it in four months. People who sold on March 23 at the trough missed a 50%+ rally (stocks from trough to August 2020). This time, the math was even more lopsided: selling cost you not just recovery, but the opportunity to buy at the lowest prices.
What's different about 2020? It tests whether you can handle speed and uncertainty. In 2008, the losses were slow and everyone was convinced they would continue. In 2020, the losses were fast and the policy response was immediate. If you can hold through the shock of a 34% stock loss in 34 days, you probably can hold through a slower, deeper loss.
But many people cannot. They panic precisely because the loss is so fast. They think "this is a free fall; it will never stop." They sell on March 23, missing the recovery entirely.
What these experiments reveal
Comparing your behavior in 2008 and 2020 tells you something important:
Type 1 investor: Held through both. You have genuine tolerance for volatility. A 70/30 or 80/20 allocation may be appropriate for you.
Type 2 investor: Sold in 2008 but held in 2020 because the speed made you confident in recovery. You have tolerance for velocity but not duration. This is unusual but real. A 60/40 is probably right; you need that faster recovery.
Type 3 investor: Held in 2008 but panic-sold in March 2020 because the shock was too fast. You can endure pain if it's gradual and familiar, but sudden losses freeze you. A 50/50 or 40/60 allocation is more appropriate. The slower tempo suits your psychology better.
Type 4 investor: Sold in both 2008 and 2020 (or would have). Your true tolerance is lower than you think. A 30/70 or 40/60 portfolio is more honest. There is no shame in this; you have other income streams or lower time horizons. Many retirees are Type 4, and they should be.
Type 5 investor: Held through both and, if you had cash, would have bought more in March 2020. You have high tolerance and conviction. An 80/20 or 90/10 is appropriate. But be honest: this type is rare, and fooling yourself about it leads to trouble.
Making the thought experiment concrete
To make this real for yourself, do the following:
-
Calculate your dollar loss in each scenario. If you have $300,000 at 60/40, a 24% loss is $72,000. A 17.5% loss (2020) is $52,500. Write these numbers down. They feel different.
-
Imagine the timeline. In 2008, it's October 2008. It's November 2008. It's January 2009. In 2020, it's February 19. It's March 9. It's March 23. Close your eyes and picture the news that day.
-
Ask yourself what you'd do without hedging your answer. Not "I think I could hold" but "I would hold" or "I would sell." Be brutally honest. Many people cannot do step 2 without feeling genuine anxiety; that anxiety is the signal that your allocation is mismatched.
-
Discuss it with your partner. If you're married or in a long-term partnership, you need to be in agreement. If one of you would sell and the other would hold, you have a serious tolerance mismatch. This usually resolves by lowering equity to the tolerance of the more conservative partner (see the next chapter on couples).
The reputational bias
One obstacle to honest self-assessment is that many people want to believe they're the type who holds through crashes. It feels brave. It feels disciplined. But if you know yourself and you panic under pressure, there is zero honor in having an 80/20 allocation you'll abandon at the bottom. Better to have a 50/50 allocation you'll hold and actually execute.
This is one reason questionnaires fail: people answer the question they wish applied to them, not the question that does.
Building the experiment into your plan
Once you've honestly answered what you'd do in 2008 and 2020, lock in an allocation that matches your answer. If you'd sell in both, 40/60 is appropriate and there's nothing wrong with it. If you'd hold in one and sell in the other, that reveals whether it's duration or velocity that breaks you, and you can target accordingly.
Then, and this is crucial: write down your answer. "In a 2008-like crisis, I would hold my 60/40 portfolio because I have 18 years to retirement and I understand that losses are temporary." Put it somewhere you'll see it. When the next crash comes—and it will—that sentence becomes your shield against panic.
Related concepts
Next
These thought experiments reveal what you'd do when markets crash. But most people don't plan for what happens when they crash—when job loss and portfolio drawdown hit at the same time. That correlation, more than any other, breaks portfolios and sends people into panic.