Topic 4: Top 4 lessons from 2008 financial crisis that are valid in 2020 also
An institution too big to fail - the collapse of Lehman Brothers in 2008 was a bolt from the blue for investors and triggered a crisis still talked about across boardrooms.
The 2008 global financial meltdown had long roots, but the effects became apparent only after September 2008 when Lehman Brothers filed for bankruptcy, sending shock waves across the globe.
The crash triggered by the collapse of one of the largest investment banks unleashed chaos, with investors registering a sharp decline in their equity portfolio.
Paving way for several reforms and changing the financial landscape, the 2008 crisis also taught some crucial lessons along the way. So, what were they? Let’s find out.
Approach Equity Investments with a Long-term Perspective
An asset class that has the potential to deliver inflation-indexed returns in the long-term, equities often end up being the first victim of skepticism of investors when markets turn turtle. However, those who can muster the courage to swim against the tide often end up being winners. One of the profound lessons taught by the 2008 crisis is to adopt a long-term approach towards equity and stay invested, blocking all noises, something which Ryan did. His equity portfolio had eroded by over 30% in 2008 with the deepening of the crisis. However, he realised that he didn’t need the money immediately and remained invested. Today, he feels it’s the best decision he could have taken back then as panicking and selling stocks would have turned his notional losses into real ones. By staying invested, he recuperated the losses of his investments within the next few months, once markets rebounded.
A Good Buying Opportunity:
While the financial meltdown made investors nervy, it turned out to be a blessing in disguise for those looking to add quality stocks to their portfolio at attractive valuations. Those with cash-in-hand utilised the opportunity to buy stocks of fundamentally-strong companies and add them to their portfolio, making meaningful gains in the long run. One of the most celebrated investors of our times, Warren Buffet made USD 10 billion, and counting, during the financial crisis. During this period, Buffet’s Berkshire Hathaway struck deals with giant blue-chip companies using its cash reserves. Those financially prudent, like Buffet, turned the crisis into an opportunity to beef up their wealth in the long run.
Diversification is not Just a Word:
The 2008 financial crisis once again brought to the forefront one of the core tenets of investing – diversification. Those who invested solely in stocks of financial companies that went bankrupt lost the money forever. It drove home the point that diversification is not a mere word and to successfully tide market volatility, you need to diversify across asset classes. Equally important is to diversify within asset classes. For example, an equity portfolio should have exposure to large, mid, and small caps instead of just one category. Also, the Lehman lesson taught that it’s more important to look at overall portfolio returns rather than individual stock performances because winners can turn into losers in no time.
Is the Situation Any Different Now?
While the nature of the crisis we have on our hands now is different from the 2008 meltdown, in the sense that the former is fundamentally a health crisis with ravaging financial implications, the lessons are not. While markets have gained some lost ground, . Having said that, we have spent enough time amid uncertainty, and living with the virus seems to be way out least for now, until a vaccine is developed. Until then, it’s essential to adopt precautionary measures and stay calm with investments and finances.
A defining moment for global financial markets, the wisdom of 2008 can hold you in good stead now and prepare you better to handle such crises with optimism. Be safe, stay positive!
Approach Equity Investments with a Long-term Perspective
An asset class that has the potential to deliver inflation-indexed returns in the long-term, equities often end up being the first victim of skepticism of investors when markets turn turtle. However, those who can muster the courage to swim against the tide often end up being winners. One of the profound lessons taught by the 2008 crisis is to adopt a long-term approach towards equity and stay invested, blocking all noises, something which Ryan did. His equity portfolio had eroded by over 30% in 2008 with the deepening of the crisis. However, he realised that he didn’t need the money immediately and remained invested. Today, he feels it’s the best decision he could have taken back then as panicking and selling stocks would have turned his notional losses into real ones. By staying invested, he recuperated the losses of his investments within the next few months, once markets rebounded.
A Good Buying Opportunity:
While the financial meltdown made investors nervy, it turned out to be a blessing in disguise for those looking to add quality stocks to their portfolio at attractive valuations. Those with cash-in-hand utilised the opportunity to buy stocks of fundamentally-strong companies and add them to their portfolio, making meaningful gains in the long run. One of the most celebrated investors of our times, Warren Buffet made USD 10 billion, and counting, during the financial crisis. During this period, Buffet’s Berkshire Hathaway struck deals with giant blue-chip companies using its cash reserves. Those financially prudent, like Buffet, turned the crisis into an opportunity to beef up their wealth in the long run.
Diversification is not Just a Word:
The 2008 financial crisis once again brought to the forefront one of the core tenets of investing – diversification. Those who invested solely in stocks of financial companies that went bankrupt lost the money forever. It drove home the point that diversification is not a mere word and to successfully tide market volatility, you need to diversify across asset classes. Equally important is to diversify within asset classes. For example, an equity portfolio should have exposure to large, mid, and small caps instead of just one category. Also, the Lehman lesson taught that it’s more important to look at overall portfolio returns rather than individual stock performances because winners can turn into losers in no time.
Is the Situation Any Different Now?
While the nature of the crisis we have on our hands now is different from the 2008 meltdown, in the sense that the former is fundamentally a health crisis with ravaging financial implications, the lessons are not. While markets have gained some lost ground, . Having said that, we have spent enough time amid uncertainty, and living with the virus seems to be way out least for now, until a vaccine is developed. Until then, it’s essential to adopt precautionary measures and stay calm with investments and finances.
A defining moment for global financial markets, the wisdom of 2008 can hold you in good stead now and prepare you better to handle such crises with optimism. Be safe, stay positive!