What Triggers Financial Crises and How They Impact Wealth

Financial crises—like the 2008 housing collapse or the 2020 COVID-19 market shock—can feel like sudden storms, shaking the foundations of your financial security. But what sparks these crises, and how do they affect your long-term wealth accumulation? More importantly, how can behavioral finance strategies help you weather sudden storms? 

As a fiduciary financial advisor in Buffalo Grove, IL, we’ve spent over thirty years helping individuals and families build and preserve their wealth, even during turbulent times. Our team of financial advisors and CERTIFIED FINANCIAL PLANNER™ (CFP®) professionals offers personalized wealth management and tax planning services for successful individuals and families. 

In today’s post, we’ll explore various financial crisis trigger points that can impact your wealth and practical strategies for staying grounded when markets are experiencing excess volatility.

Understanding the Trigger Points for Financial Crises

As discussed in our Our 2 Cents podcast episodes, financial crises often stem from economic, psychological, and systemic factors. Here’s a look at different types of triggers that can spawn a financial crisis:

• One major trigger is excessive risk-taking, often fueled by overconfidence in the markets. Take, for instance, the 2008 crisis, when banks and investors piled into subprime mortgages, assuming housing prices would keep rising—a classic case of “irrational exuberance” occurred, a term coined by economist Robert Shiller. When those assumptions failed, the fallout was catastrophic, wiping out trillions in wealth globally.
• Another trigger point is investment bubbles, driven by herd behavior. Behavioral finance research points to the momentum effect, when investors chase rising prices, inflating assets beyond their true value. The dot-com bubble of 2000 saw dotcom stocks soar, only to crash when reality set in, with the S&P 500 dropping 26% in months. 
• Policy changes can also ignite crises. In 2025, Trump’s tariff threats led to a $5 trillion correction in the S&P 500, as trade war fears spooked investors, showing how geopolitical moves can ripple through markets.
• Debt overload is another culprit. When consumers, companies, or governments borrow too much, a small shock—like rising interest rates—can trigger defaults, as seen in the 1980s recession, when Federal Reserve rate hikes led to a 17% drop in the S&P 500 by 1982. 
• Unmet earnings expectations can also cause market corrections. These can be in short duration when the cause for an earnings decline is widely expected.
• Finally, external shocks, like pandemics or geopolitical conflicts, can destabilize markets. The 2020 COVID-19 crash saw the S&P 500 plummet 34% in weeks, driven by fear and uncertainty, a sentiment echoed in our YouTube video on market volatility.

How Financial Crises Can Impact Your Wealth

Financial crises can significantly disrupt your wealth, affecting your portfolio and financial stability. Here are five ways they might impact you:

• Asset Value Declines: Crises like the 2008 housing crash, where a $1 million portfolio might lose $100,000 in a 10% correction, which could delay retirement dates and plans.
• Income Disruption: Recessions often reduce business revenue or lead to layoffs; the 2008 crisis saw unemployment hit 10%, forcing many to dip into savings, shrinking wealth reserves.
• Rising Costs: Crises can inflate expenses—healthcare costs might spike with economic strain, draining your nest egg faster than planned.
• Emotional Decisions: Behavioral biases, like panic selling during 2020’s 34% S&P 500 drop, can lock in losses; missing the recovery (68% gain by year-end) might cost $200,000 on a $1 million portfolio.
• Market Access Issues: Crises can impact liquidity—think 2008’s credit crunch—making it hard to sell assets or access funds, potentially stunting wealth management goals, like funding a child’s education.

Watch our co-founder, Steve Lewit, discuss the challenges Gen Xers face as the “Sandwich Generation” on WGN 9 News.

Behavioral Finance Strategies to Protect Your Wealth

Behavioral finance combines psychology with finance to explain how emotions and habits—like fear, greed, anxiety, or following the crowd—can impact financial decisions. 

By understanding these biases, you can make more informed, logical choices—like exercising discipline, for example, sticking to a plan instead of reacting to market noise. Keep in mind the media are not investment experts. And they like noise as long as it drives followers and listeners. 

At SGL Financial, we use these insights in our financial planning in Buffalo Grove, IL, to help you stay on track, no matter the market’s current condition or expectations for the future. Here are some forms of financial biases you can fall prey to:

1. Loss Aversion: People feel losses more intensely than gains. During a market correction, you might sell at a loss, fearing further decline and missing the eventual recovery.
2. Overconfidence Bias: Investors often overestimate their knowledge or control, leading to risky bets. In the 2000s dot-com bubble, overconfident investors poured into tech stocks, contributing to a 26% S&P 500 crash when the bubble burst.
3. Herd Behavior: The tendency to follow the crowd can inflate bubbles or deepen crashes. In 2020, herd selling during the 34% S&P 500 COVID-19 drop caused many to miss the 68% rebound, as fear drove mass exits.
4. Recency Bias: Giving too much weight to recent events can skew decisions. After 2025’s tariff-driven correction, you might assume markets will keep falling, ignoring historical recoveries like the S&P 500’s 400% rise since 2009.
5. Anchoring Bias: Fixating on initial information—like a stock’s past high of $100—can distort decisions. If that stock drops to $80 during a crisis, you might hold on, hoping it’ll return to $100, even if fundamental analysis suggests otherwise.

Get to know SGL in our new video.

Why SGL Financial?

At SGL Financial, we don’t just manage wealth—we aim to help you live a life with financial independence. Here are some of the reasons why successful individuals and families partner with us for personalized wealth management, planning, and retirement planning services: 

• We prioritize your needs, providing our full attention and genuine respect.
• As fiduciaries, we always act in your best interest, putting you first.
• Our Buffalo Grove financial advisors provide personalized, tailored advice, not one-size-fits-all solutions.
• We handle your requests efficiently, focusing on exceptional client service.
• We clearly explain all the pros and cons, ensuring an unbiased, open approach.
• We value education, offering frequent events, updates, and learning opportunities.
• We deliver customized financial services, reports, and plans to fit your needs.
• We host community events to share our specialized financial planning in Buffalo Grove, IL.

Are you ready to learn more about how SGL Financial can help you accumulate, manage, and distribute your wealth? Let’s connect.