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Stock Market Crash 2008-9: Lessons for Investors

Leverage can be a dream come true in up markets and your biggest nightmare on the way down. Cheap and plentiful debt reinvigorated the market after the fallout following 9-11 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/equity ratios in their investments and understand that higher expected returns are often the result of higher debt/equity ratios. Those investments are inherently riskier and ultimately vulnerable to being lost during severe market downturns.

Financial media and TV pundits can offer valuable market insights, but rarely provide worthwhile investment advice. 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.


You must play a meaningful role in managing 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.

You should invest in small increments, slowly over time. 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.

Don’t be greedy; 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.

Always keep some cash on hand for unexpected buying opportunities. 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.

Strive to minimize investment costs. This may be the most important lesson highlighted herein, 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.

Managing your money has never been more difficult than it is today. These lessons are intended to provide some discipline for managing your money effectively during the challenging times ahead.

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