![\"Steve](\"https:\/\/www.europesays.com\/us\/wp-content\/uploads\/2025\/09\/TDP-L-steve-booren-01.jpg\")
Steve Booren (handout)<\/p>\nAs a student of markets, I believe history is a roadmap for the future. The past may not repeat, but it certainly tends to rhyme. So when I came across \u201cA History of the United States in Five Crashes\u201d by Scott Nation, I was hooked. Beyond a simple recounting of events, the book weaves in regulatory missteps, economic forces, and even investor behaviors that turned boom into bust. The five covered crashes \u2014 in 1907, 1929, 1987, 2008 and 2010 \u2014 offer insight into how markets unravel and, more importantly, how investors\u2019 behavior and discipline can hurt or help.<\/p>\n
Nation suggests five principles stemming from these market crashes. Let\u2019s examine each.<\/p>\n
Steve Booren (handout)<\/p>\n
The first principle is simple: Beware of shiny new financial innovations; they often hide risks that fuel downturns. Nation\u2019s central thesis is that crashes frequently stem from novel financial products that lull investors into false security. In 1907, it was trust companies, which operated like banks but without their oversight. The 1906 San Francisco earthquake led to a run on these trust companies, ultimately causing their collapse.<\/p>\n
Fast-forward to Black Monday, 1987. \u201cPortfolio insurance\u201d \u2014 a newfangled, computer-driven, derivative strategy designed to hedge against losses \u2014 accelerated the sell-off while automated trades piled on. This led to a 22.6% single-day plunge. In 2008, mortgage-backed securities and credit default swaps, touted as ways to spread risk, instead concentrated it, turning subprime loans into a global contagion. And in 2010\u2019s Flash Crash, algorithmic trading bots created a feedback loop of erroneous trades, wiping out nearly $1 trillion in market value in minutes.<\/p>\n
The lesson: Scrutinize any \u201crevolutionary\u201d product or strategy, assessing it for any hidden leverage. These \u201cinnovations\u201d lower our guard during rallies, only to betray us when the market turns. As an investor, stick to what you know. More than return, consider the value of diversified, transparent assets \u2014 liquidity, simplicity and relatability are often undervalued.<\/p>\n
Nation\u2019s second principle examines the classic crash pattern: a euphoric rally, a flawed vehicle and an unexpected spark. He argues that every meltdown follows a similar script: Optimism drives markets to irrational heights, investors adopt a financial mechanism that often requires selling at the worst time, and a catalyst sets off the chain reaction.<\/p>\n
The 1929 crash is a perfect example. After years of speculative frenzy fueled by easy credit and margin buying (the mechanism that let investors borrow heavily), the catalyst was a fraud scandal in London that exposed market vulnerabilities. This led to Black Tuesday and the Great Depression. Similarly in 2008, the housing boom turned when mortgages went sour, resulting in defaults that triggered cascading losses for many who believed in the \u201csure thing.\u201d<\/p>\n
Improving investor behavior means staying vigilant during bull markets. When stocks hit record highs (which often come before crashes), pay attention to valuation, not price. Pre-plan for buffers to weather an inevitable downturn. Remember that leverage, also known as debt, is a double-edged sword. It overcompensates during upturns but becomes a sharp razor when markets fall. Freedom comes from not owing anyone anything.<\/p>\n
Nation\u2019s third principle reminds us not to rely solely on regulation, because it\u2019s always playing catch-up. He contends that regulatory frameworks evolve reactively, often too late to prevent disaster. In 1907, virtually nonexistent federal oversight allowed J.P. Morgan to act as a \u201cprivate savior\u201d stemming panic \u2014 ultimately prompting the creation of the Federal Reserve. By 1929, the Fed existed but bungled monetary policy, which further inflated the bubble. The 1987 crash exposed gaps in electronic trading, leading to the creation of circuit breakers \u2026 which didn\u2019t prevent the algorithmic issues of 2010. And 2008? Despite post-1990s laws like the Home Ownership and Equity Protection Act, regulators under Alan Greenspan ignored warnings about predatory lending and derivatives.<\/p>\n
Innovation outpaces regulation. For investors, this means due diligence is required. Don\u2019t assume the SEC, Federal Reserve, or your favorite politician has your back. Instead, read annual reports and prospectuses, and understand company balance sheets. At least seek to diversify across asset classes. Treat regulation as a pseudo-safety net, not a guarantee.<\/p>\n
Nation\u2019s fourth principle focuses on liquidity: available money. During crises, liquidity tends to evaporate, even among \u201csolid\u201d assets. In 1907, banks hoarded cash, freezing credit and forcing fire sales. The 1929 margin calls amplified this, as leveraged (read indebted) investors dumped stocks to cover their borrowing. Today, you might conclude that instant digital trading makes this a lesser issue, but it\u2019s actually the opposite. See the 2020 and 2025 drops as examples for how quickly money can disappear.<\/p>\n
A liquidity crunch is challenging as an individual investor. Instead, focus on stabilizing your financial foundation. Reduce high-interest debt to avoid forced sales during job losses \u2014 a common occurrence during downturns. Maintain an emergency fund of six-to-12 months\u2019 expenses in liquid assets like cash, treasuries or high-yield money-market funds. Personal liquidity lets you capitalize on chaos, investing when others are fearful without jeopardizing your wealth.<\/p>\n
Nation\u2019s final principle encourages investors to watch for misaligned incentives that distort markets. Human behavior, driven by greed, is a recurring villain. In 2008, bankers packaged risky mortgages into securities because their bonuses rewarded volume over quality; meanwhile rating agencies rubber-stamped these securities for fees. Homeowners, incentivized by no-down-payment loans, overborrowed.<\/p>\n
Incentives shape outcomes, so align your plan with your values. As an investor, favor companies that encourage executives to put skin in the game. Value and foster skepticism. Question why a deal seems too good, and you\u2019ll sidestep many traps. Be wary of advertising, media and the internet.<\/p>\n
Nation\u2019s five principles show that while crashes are seemingly inevitable, their wake need not sink your boat. Studying others\u2019 experiences can inform your future. Each crash advances the system, but human nature endures. By applying these lessons, you\u2019ll improve both your portfolio and mindset \u2014 converting fear into opportunity.<\/p>\n
Steve Booren is the founder of Prosperion Financial Advisors in Greenwood Village. He is the author of \u201cBlind Spots: The Mental Mistakes Investors Make\u201d and \u201cIntelligent Investing: Your Guide to a Growing Retirement Income\u201d He was named by Forbes as a\u00a02024\u00a0Best-in-State Wealth Advisor, and a Barron\u2019s\u00a02024\u00a0Top Advisor by State.<\/p>\n","protected":false},"excerpt":{"rendered":"As a student of markets, I believe history is a roadmap for the future. The past may not…\n","protected":false},"author":3,"featured_media":243883,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13],"tags":[64,129958,1370,135,2437,67,132,68,3642],"class_list":{"0":"post-243882","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets","8":"tag-business","9":"tag-improving-investor-behavior","10":"tag-latest-headlines","11":"tag-markets","12":"tag-stock-market","13":"tag-united-states","14":"tag-unitedstates","15":"tag-us","16":"tag-wall-street"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@us\/115242345767914613","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/243882","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=243882"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/243882\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/243883"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=243882"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=243882"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=243882"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}