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Lessons To Learn From Stock Market Crash 2008:
#1 Consider Debt to equity ratio
Cheap and plentiful debt reinvigorated the market and ultimately propelled the market to new heights in a few short years. That debt also led to a housing bubble that burst in 2007 and single-handedly nearly brought down our entire global financial system.
At its peak, global debt levels exceeded global GDP by nearly a 4-to-1 ratio. Experts believe that the global debt ratio will need to be cut in half or more before the massive de-levering of the global economy occurring now comes to an end.
The process will be painful and is expected to last for several years. At a micro level, investors need to consider debt to equity ratios in their investments and understand that higher expected returns are often the result of higher debt to equity ratios. Those investments are inherently riskier and ultimately vulnerable to being lost during severe market downturns. It is one of the most important lesson to learn from Stock Market Crash 2008.
#2 LONG TERM INVESTMENTS.
Due to Stock Market Crash 2008, the dramatic increase in stock market volatility in recent years has created a professional trader’s paradise, but has also created a treacherous environment for other investors. Consequently, investors should have a long-term horizon of at least 5 years and preferably 7-10 years for their stock portfolios.
Long time horizons provide flexibility to recover from protracted and dramatic market setbacks. Strict “buy-and-hold” strategies for individual stocks are not recommended, but needing to sell out of stock positions on short notice to raise cash for other purposes will not produce satisfactory investment results.
Stocks may be “liquid” investments, but “fire” sales at steeply discounted prices provide little consolation to sellers.
#3 GLOBAL STOCK MARKET.
The U.S. is still the primary growth engine of the global economy. However, the European Union is today the world’s largest single economy and the BRIC economies (Brazil, Russia, India, China) along with other emerging markets will most likely drive global economic growth for the next several generations.
Few Decades ago the U.S. comprised half of the world’s stock market capitalization, but today its share represents about a quarter of the global stock market. U.S. investors will need to consider the risks and opportunities that will come from being inextricably connected to that global marketplace.
#4 DIVERSIFICATION IS KEY.
Many believe that due to Stock Market Crash 2008 and the downturn in all stock categories means that diversification does not work. However, diversification only promises to reduce portfolio risk by mitigating the specific risks attendant to individual investments; it never promises to insulate investors from overall market risk, which is exactly what we’ve experienced during the past two years.
Diversification is still an important risk mitigation tool that arises from combining several asset categories (stocks, bonds, etc) or combining variety within a particular asset category, such as stocks. In fact, many experts believe that, for maximizing risk-adjusted returns, a portfolio mix of many types of assets is even more important than the mix of stocks in a portfolio.
Therefore, first consideration should be given to allocating resources to stocks, bonds, gold, cash, etc. The stock allocation should be a secondary consideration. Within the stock category, investors traditionally seek to diversify according to industry sectors, geography, investment style (e.g., growth versus value) or market capitalization (e.g., nano, micro, small, medium, large, mega-cap) in order to minimize specific investment risks over the long term.
#5 INVESTING IN “BLUE CHIP” COMPANIES.
During Stock Market Crash 2008, several venerable long-standing institutions disappeared or were saved from extinction by heroic government bailouts. AIG, Citigroup, Lehman, Fannie and Freddie and many other household names are on that list.
An examination of the 30 stocks comprising the Dow-Jones Industrial Average shows that even major non-financial companies dramatically fell in value, some below $10 per share, during the past year. The past two years has proven that the idea of buying stock in today’s great companies and blindly holding them forever is a thing of the past.
#6 STRIVE TO MINIMIZE INVESTMENT COSTS.
This may be the most important lesson to learn from Stock Market Crash 2008, and the one most likely to yield tangible results. The investment environment for many years to come promises to be fraught with many serious challenges, such as high inflation and high interest rates, which will make attractive investment returns more difficult than ever to achieve.
You can’t control market movements but you can control many of your investment costs, and reducing them may be easier than you think. For example, stock index funds that deliver the same returns often vary materially in the annual fees/costs they charge investors.
Sometimes cost disparities may be as much as 50-100 basis points (or 0.5-1.00%) and those seemingly small cost differences can add up to substantial cost savings over long time periods. A 50 basis point saving on a $10,000 investment in a stock index fund that grows at 8% per year can produce a total cost saving of nearly $800 over ten years.
In addition, you should avoid “load” mutual funds that charge an up-front fee, or at least have a compelling reason to choose one when you do. Some funds can be complicated, especially funds wrapped in annuities, and don’t always clearly delineate the various of fees and costs inherent in such products.
#7 DONT FOLLOW ADVICE OF FINANCIAL MEDIA .
Mark Twain once quipped that “if you don’t read the newspaper you’re uninformed; if you do you’re misinformed.” For the past two years, the mainstream financial media seemed as numb as the rest of us to market realities, as their reports vacillated between optimistic and pessimistic market forecasts.
Look to the media to gain important insights about the mechanics of how the market works or to provide a historical context for market events, but resist acting on media advice when managing your portfolios. It is one of the most important lesson to learn from Stock Market Crash 2008.
#8 MANAGE YOUR MONEY.
Recent financial scandals, such as Bernard Madoff’s $65 Billion Ponzi scheme, make it clear that you can not be too careful in managing your money, even when employing long-standing reputable professionals.
So, even if you trust and respect the expertise of your broker/financial advisor/investment manager, remember that you are uniquely qualified and motivated to watch out for your own interests.
#9 YOU SHOULD INVEST IN SMALL INCREMENTS.
Dollar-cost-averaging is one popular technique for implementing such a discipline, and directs investors to periodically commit (e.g., monthly, quarterly) a fixed amount of money to their investment portfolios. Doing so will guarantee that you buy more investment shares in down markets than up markets, which can make a real difference in your investment returns in these volatile markets.
#10 TAKE PROFITS AS THEY BECOME AVAILABLE.
No one ever went broke taking a profit, and the mirror image of investing slowly is to take some profits periodically as they arise. In rising markets you may feel foolish cashing out of investments as they appreciate, but when the bottom drops out of the market, suddenly and unexpectedly, you’ll feel vindicated and relieved that you conscientiously took some of those profits.
#11 ALWAYS KEEP SOME CASH ON HAND.
Extreme market volatility is unsettling, but volatility creates significant buying opportunities when you least expect them. You need to be ready. As you trade in and out of your investments, you should hold at least 5-10% of your portfolio in cash at all times.
Managing your money has never been more difficult than it is today. These are the most important lesson to learn from Stock Market Crash 2008 and are intended to provide some discipline for managing your money effectively during the challenging times ahead.
Anything I Missed?
So this is the list of Lessons To Learn From Stock Market Crash 2008.
There you go guys, take all these points into account when entering the stock market.
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