These Are the 7 Things I Learnt From the Financial Crisis of 2008
The collapse of Lehman Brothers in 2008 jolted people out of their comfort zones. It unleashed chaos as many lost their investments in the market, and many lost their jobs.
Apart from the damage done, the crisis paved the way for financial reforms.
On the 10th anniversary of what can be termed a devasting crisis, we seek to take stock of how the crisis taught some key investment lessons.
Before we start with the lessons taught by this crisis, let us take a quick sneak peek at the economic recession of 2008:
Economic Recession of 2008
It started in 2007 with a crisis in the subprime mortgage sector (lending to people who may have difficulty maintaining repayment schedules). One of the largest organizations, Lehman Brothers, declared itself bankrupt.
The announcement resulted in the global financial system collapsing.
One of the largest bankruptcy in the US, the Lehman Brothers had over US$ 600 billion in assets with less than US$ 25 billion of their equity.
This resulted in a heavily leveraged structure. Thus, even a modest fall of around 5% could technically wipe out the capital.
Lehman’s announcement resulted in a correction of nearly 5% which became the single most massive fall after 9/11.
While the crisis started in the US, the Indian market also faced the heat and the benchmark index – S&P BSE Sensex, which was already down by nearly a quarter, started to go down further.
You may want to know more about the 2008 Market Crash - The Global Financial Crisis.
What Did I Learn From the Financial Crisis of 2008?
These are the 7 things I learnt from the 2008 crisis.
1. Have Patience, Remain Invested and Re-align Your Portfolio
Individuals saw portfolio wealth being eroded by as much as 30-40%.
This ignited panic among investors, who ended up selling their portfolios without proper due diligence. Some amongst the lot decided to take a step back and understand what the crisis meant for the Indian economy in reality.
The ones who believed that it was more of a panic selling with no material change in the fundamentals emerged as the winner.
Thus, staying invested was perhaps the best decision, as selling holdings when nothing has changed fundamentally would result in booking losses.
Remember, equities or equity-dominated funds are not about quick bucks; it is about building wealth step-by-step over many years.
2. Borrow if You Need, Not Because You Qualify
The recession was triggered when an enormous credit bubble collapsed.
Debt is a huge handicap, particularly during an economic downturn.
Thus, investing after borrowing is not a good idea. Always borrow money only when you need it, and you can repay the loan while not compromising on your necessities.
3. Avoiding the Stock Market is Not Preventing Risk!
Like everything in life, investing involves a trade-off.
With stocks, you lose money when the market is falling, but avoiding the market by thinking about the downside only is like looking one way while crossing a road.
If you look at it the other way, stocks can give you returns that are superior to any other instrument.
Also, if you seek to safeguard your money by investing in debt instruments, you tend to forget that the interest fetched in these instruments comes with inflation risk.
You should divide your portfolio between stocks and bonds.
While shares help you accumulate wealth, the bond portfolio safeguards your risk.
4. Never Speculate. Never.
During 2008, a lot of people speculated hand over feet in equities and derivative products with an aim to get rich overnight.
In many cases, they even borrowed to invest in derivatives that are considered weapons of mass destruction by investor Warren Buffet.
While they must have won in multiple instances but in 2008, Mr Market was on a revenge spree – revenge that no one would ever forget.
Stocks lost their value leaving aside derivatives. Remember, you should never speculate or copy others as you don’t know what would be in store for you.
5. Active Participation Matters
Investment in the market needs time. You need to spend time reading, understanding and acting.
You need to spend time understanding your portfolio, the impact of events on your portfolio and its instruments.
People who invest and occasionally monitor their portfolios, many of them haven’t returned to the market yet. Thus, remember it’s your money, and you need to manage it.
6. Love Your Money and Not the Stock/fund
The price you pay for the acquisition of a stock or a fund matters the most.
While you may have some soft corners for your investment, they can always come down at any point.
No stock is safe; no fund is risk-free.
You need to understand that nothing remains good for long. Thus, don’t feel bad when you need to sell your investment, and it is good to sell as then only you can enter into a new opportunity that may be more lucrative.
7. Trust Me, You Don’t Want Sleepless Nights!
People tend to think that the capital market is the place to make quick money.
It is not. It needs patience and persistence to succeed.
An investment that may result in sleepless nights is worth ignoring. You should keep a sense of respect for the market’s inherent risk.
On a lighter note, our brains are not wired to be purely rational investors.
We need to learn from our mistakes and implement them in our daily lives. I haven’t forgotten the lessons of 2008 and probably will never because it only made me wiser.
Please understand a simple thing. “You are a tiny cog in a massive machine.”
While you have taken all the precautions, you will never know when others can press the wrong button on the device, and you, not crash.
So, be disciplined and humble with the market. A right decision comes with peace, detachment, and acceptance.
Happy Investing!
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.