Investors were hammered by massive declines as a recession swept the globe in 2008 and 2009. In the midst of the chaos, experts began calling many decades-old investment practices into question.

Is it time to try a new approach? Let's take a look at five trusted investment strategies to examine whether they still hold up in a post-credit crisis. (For background reading, see Recession-Proof Your Portfolio.)

  1. 1. Buy and Hold
    By 2009, the global economic malaise had erased a decade's worth of gains. Buying and holding turned out to be a one-way ticket to massive losses. From 2007 to 2008, many investors who followed this strategy saw their investments lose at least 50%. So does a down market mean that buy and hold is done and gone?

    The answer is "no". In fact, history has repeatedly proved the market's ability to recover. The markets came back after the bear market of 2000-2002. They came back after the bear market of 1990, and the crash of 1987. The markets even came back after the Great Depression, just as they have after every market downturn in history, regardless of its severity. (To learn more, read A Review Of Past Recessions.)

    Assuming you have a solid portfolio, waiting for recovery can be well worth your time. A down market may even present an excellent opportunity to add holdings to your positions, and accelerate your recovery through dollar-cost averaging. (For more insight, see DCA: It Gets You In At The Bottom.)

  2. 2. Know Your Risk Appetite
    The aftermath of a recession is a good time to reevaluate your appetite for risk. Ask yourself this: When the markets crashed, did you buy, hold or sell your stocks and lock in losses? Your behavior says more about your tolerance for risk than any "advice" you received from that risk quiz you took when you enrolled in your 401(k) plan at work. (For more insight, see Risk Tolerance Only Tells Half The Story.)

    Once you're over the shock of the market decline, it's time to assess the damage, take at look what you have left, and figure out how long you will need to continue investing to achieve your goals. Is it time to take on more risk to make up for lost ground? Or should you rethink your goals?

  3. 3. Diversify
    Diversification failed in 2008 as stock markets around the world swooned. Hedge funds and commodities tumbled too. Bond markets didn't fare much better as only U.S. Treasuries and cash offered shelter. Even real estate declined.

    Diversification is dead … or is it? While markets generally moved in one direction, they didn't all make moves of similar magnitude. So, while a diversified portfolio may not have staved off losses altogether, it could have helped reduce the damage. (For more insight, see The Importance Of Diversification.)

    Fixed annuities, on the other hand, had their day in the sun in 2009 - after all, a 3% guarantee sure beat holding a portfolio that fell by half. Holding a bit of cash, a few certificates of deposit or a fixed annuity can help take the traditional strategic asset allocation diversification models a step further.

  4. 4. Know When to Sell
    Indefinite growth is not a realistic expectation, yet investors often expect rising stocks to gain forever. Putting a price on the upside and the downside can provide solid guidelines for getting out while the getting is good. Similarly, if a company or an industry appears to be headed for trouble, it may be time to take your gains off of the table. There's no harm in walking away when you are ahead of the game. (To learn more about when to get out of a stock, see To Sell Or Not To Sell.)
  5. 5. Use Caution When Using Leverage
    The events that occurred following the subprime mortgage meltdown in 2007 had many investors running from the use of leverage. As the banks learned, making massive financial bets with money you don't have, buying and selling complex investments that you don't fully understand and making loans to people who can't afford to repay them are bad ideas. (For background reading, check out The Fuel That Fed The Subprime Meltdown.)

    On the other hand, leverage isn't all bad if it's used to maximize returns, while avoiding potentially catastrophic losses. This is where options come into the picture. If used wisely as a hedging strategy and not as speculation, options can provide protection. (For more on this strategy, see Reducing Risk With Options.)

Everything Old is New Again
In hindsight, not one of these concepts is new. They just make a lot more sense now that they've been put in a real-world context.

In the early stages of the 2008-2009 U.S. economic downturn, experts argued that the Europe and Asia were "decoupled" from America and that the rest of the world could continue to grow while the U.S. shrank.

They were wrong. When America sneezed, the rest of the world got the flu, just like always.

Now think back to the dotcom bubble of the late 1990s, when the pundits argued that technology offered unlimited promise and that companies like America Online (AOL) were the wave of the future, even when many of these companies had no profits and no hope of generating any, but still traded at hundreds of times their cash flows. When the bubble burst and the dust settled, nothing had changed. The markets worked the same way they always had.

It's Different This Time – Or Is It?
In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.

Related Articles
  1. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  2. Investing Basics

    Contingent Convertible Bonds: Bumpy Ride Ahead

    European banks' CoCos are in crisis. What investors who hold these high-reward but high-risk bonds should know.
  3. Economics

    Can the Market Predict a Recession?

    Is a bear market an indication that a recession is on the horizon?
  4. Mutual Funds & ETFs

    The 4 Best T. Rowe Price Funds for Growth Investors in 2016 (TROW)

    Discover the four best mutual funds administered and managed by T. Rowe Price that specialize in investing in stocks of growth companies.
  5. Mutual Funds & ETFs

    The 3 Best T. Rowe Price Funds for Value Investors in 2016

    Read analyses of the top three T. Rowe Price value funds open to new investors, and learn about their investment objectives and historical performances.
  6. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  7. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  8. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  9. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  10. Retirement

    Early Out: A Realistic Plan to Retire Younger

    If you want to retire ahead of schedule, it'll take some extra planning.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  5. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  6. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center