5 Lessons From The Recession

AAA

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.
Related Articles
  1. Trading Strategies

    5 Lessons From The Recession

    The bear market of 2008 was a game-changer for many investors. Find out what lessons you can take away from it.
  2. Bonds & Fixed Income

    7 Lessons To Learn From A Market Downturn

    Don't learn these lessons the hard way. Read on to make sure you can weather an unstable market.
  3. Retirement

    Bear Spray For Your 401(k)

    You can defend your retirement savings from the ravages of a bear market. We'll show you how.
  4. Options & Futures

    5 Lessons From The World's Biggest Bankruptcies

    We can learn of investing strategies by studying previous financial disasters.
  5. Personal Finance

    5 Financial Lessons You Must Teach Your Kids

    Teach your kids the relationship between work, money and achieving financial goals with these five simple lessons.
  6. Options & Futures

    5 "New" Rules For Safe Investing

    Did the credit crisis leave a new landscape for investors? Maybe, but it's not as unfamiliar as you may have imagined.
  7. Options & Futures

    Retirement Lessons To Teach Your Children

    If your retirement plan hasn't worked out, at least your children can learn from your mistakes.
  8. Insurance

    Four Big Investor Errors

    These simple lessons can cut your losses.
  9. Retirement

    6 Ways To Maximize The Value Of Your 401(k)

    From matching employer contributions to proper asset allocation, we'll tell you how to get the most out of your plan.
  10. Options & Futures

    You CAN Retire In A Recession

    Just because you receive your gold watch during a recession, doesn't mean you can't retire on time.
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center