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How Have We Changed Two Years After the Market Crash of 2008?

photo: David Reece

We’re almost at the two year anniversary mark of the stock market crash of 2008.

Dubbed as “the black week,” the week that started on Monday, October 6, saw the Dow Jones Industrial Average close lower in all five trading sessions and lose 18% of it’s value.

But it was a few weeks before that – on September 15 – that the collapse of Lehman Brothers and the Dow’s subsequent 500-point drop (the largest single-day drop since the aftermath of the Sept. 11 terrorist attacks) when the panic surrounding the financial crisis peaked.

Two years later, where do we stand?

The recession, skyrocketing unemployment rate, and general fear around the stability of the U.S. and world’s economy has no doubt changed us. But to what extent? How has our savings, investment, and overall sentiment about our finances changed over the past two years?

Let’s take a look.

Saving Up

As you can see in the graph below, the U.S. personal savings rate has roughly doubled from around 3% in the third quarter of 2008 (right before the market crash), to around 6% in Q2, 2010.

That personal savings rate is six times what it was as recently as 2005, when it hit its lowest level. Today, it is, in fact, the highest that it’s been since the mid 90′s. The savings rate had been in a steady decline since the mid 80′s, when it topped out at about 11%, according to the Bureau of Economic Analysis.

Clearly, Americans are saving more. Whether it is out of fear, because of stricter lending guidelines, or a complete shift in consumption habits, we are putting more of our discretionary take-home income into the bank instead of spending it. Since our economy is largely driven by consumer spending, that hasn’t been the best thing for job creation or the stock market, but there are certainly some positive benefits that come from saving, particularly, less debt.

Investing Habits

Dow Jones Industrial Average (October, 2008 – September, 2010)

It’s no secret that investors have shied away from the stock market, and for good reason. The Dow Jones Industrial Average has been hovering around the 10,000 mark most of this year – a level that it first hit back in 1999. That’s right. If you invested all of your money back in 1999, you’ve seen two market crashes, and it’s quite possible that over that 11-year span you didn’t make a dime. And if you started investing somewhere in the middle of that period, it’s very possible you lost a great deal of money.

There is now a heavy distrust in Wall Street and its regulators. And investing behavior is following suit. Since early 2008, equity mutual funds have seen total cash outflows of about $245 billion, according to data from the Investment Company Institute, a mutual fund industry trade group. More conservative bond mutual funds, on the other hand, have seen total inflows of close to $616 billion.

Could the gen-X’ers and gen-Y’ers who lived through these two crashes at ages when they just started dipping their toes into investing in stocks become the lost generation of investors? Only time will tell if either generation regains its trust of the stock market .

Overall Financial Sentiment

Back in May, I ran a few polls on my personal finance blog, 20somethingfinance.com. I asked a few simple questions, and the responses were intriguing.

One of the questions was, “Are you better or worse off financially than you were two years ago?”

The response was definitive:

A total of 91% felt that they were the same or better off financially than before the start of the financial crisis.

Surprised? When you think about it, you shouldn’t be. Gen-X’ers and Gen-Y’ers (the majority of my blog’s readers) have plenty of time to recover economic losses and don’t hold as much savings in the market as older generations. Our losses were somewhat limited in comparison.

I also asked a follow-up question, “How do you feel overall about your finances?”. The results were definitely not in-line with the answers to the previous question.

Here, more than half of respondents said that they were “worried,” or “struggling.”

There are certainly those out there that are struggling mightily at the moment, as the unemployment situation has not improved much since the start of the crisis. Their troubles should not be dismissed.

But why is there such a discrepancy between the reality of our financial situations and how we feel? Perhaps we’re listening to the media and politicians more than we should be.

Americans are saving more and cutting debt at levels that haven’t been seen in almost two decades. That might result in some short-term pain for the economy and job creation, but an economy that is almost entirely dependent on consumer spending is simply not sustainable.

We are re-prioritizing – and, many argue, for the better. Keep working hard, attack your debt, save for emergencies and the future, and drown out the noise of those who want you to feel like things are worse than they really are.

GE Miller is the author of the personal finance blog, 20somethingfinance.com.