The bear market of 2008 was a game-changer for many investors. Prior to 2008, a market decline of staggering proportions was a philosophical idea. The Great Depression was a distant event that few people alive today were even around to experience - and most them were so young when it occurred that it had little or no impact on their personal investment portfolios. Now that we've lived through a stock market decline in 2008-2009 that not only wiped out a decade's worth of growth but also changed the face of Wall Street forever, what have we learned? Here we look at those lessons. (For more, check out What Caused The Great Depression?)
1. Risk Matters
Clearly, the amount of risk taken in one's investment portfolio will capture a significantly greater degree of attention in the years ahead. The decline of 2008 taught us that once-in-a-lifetime events can occur. We've also learned that diversification means more than just stocks and bonds. The simultaneous decline of stocks, bonds, housing and commodities is a stark reminder that there are no "sure bets," and that a cash cushion could save the day when times get tough. The blind pursuit of profit with no thought to the downside is a strategy that failed spectacularly.
2. Experts Don't Know Everything
We put a lot of trust in experts, including stock analysts, economists, fund managers, CEOs, accounting firms, industry regulators, government and a host of other smart people. They all let us down. A great many of them lied to us, intentionally misleading us in the name of greed and personal profit. Even index fund providers let us down, charging us a fee for the "privilege" of losing 38% of our money. If we've learned anything from the experience, it should be that blind trust is a bad idea and that the majority experts can't predict the market.
3. You Can't Live on Averages
Market projections, such as those seen in the hypothetical examples included in many 401(k) enrollment kits, always seem to show an 8% return per year, on average doubling your money every eight years. Those pretty pictures make it easy to forget that markets don't usually move in a straight line. All of those projections are based on the idea that investors should buy and hold, but 2008 showed that strategy doesn't always work, particularly for investors who are approaching retirement.
4. You Shouldn't Buy What You Don't Understand
The marketplace is filled with complex and exotic offerings that promise the world to investors. Derivatives, special investment vehicles, adjustable-rate mortgages and other new-fangled investments racked up huge fees for financial services firms and huge losses for investors. Don't buy what you don't understand is a trite but true sentiment that may be the biggest lesson from the recession.
5. You Can't Delegate Your Future
Far too many investors operate on the "set it and forget it" plan. They dutifully make their biweekly contributions to their 401(k) plans and let the years pass, hoping for magic by the time they retire. Anyone on that plan who expected to retire anytime between 2008 and 2018 or so is likely in for a rude awakening. Set it and forget it failed. Even target-date-funds, which are supposed to automatically move assets to a more conservative stance as retirement approaches, didn't all do the job investors expected them to do. Moving, forward, "pay attention" may be a better mantra than set it and forget it.