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10 Years After the 2008 Crisis: 3 Lessons Learnt

It’s been 10 years since the collapse of Lehman Brothers which precipitated the 2008 global financial crisis. The harrowing event has left a mark on some investors.

Many investors’ net worth were cut in half back then as stocks plummeted suddenly and sharply. The acute pain felt during that time is cannot be understated, and many have learnt painful lessons from the experience.

As the event unfolded, I was in university, but I was still aware of what happening. Here are three lessons we can all learn from the global financial meltdown, and the ten years that have passed since.

Lesson 1: A financial crisis will come around eventually and we need to be prepared

No matter how long a bull market runs, there will eventually be a time when it runs out of steam, and a new financial crisis comes along. Following the dot-com bubble in 2001, the Fed engaged in expansionary monetary policy and decreased interest rates. It encouraged borrowing and discouraged savings, resulting in a long economic boom. However, as we now know, this growth was not going to last as too many people over-leveraged themselves which resulted in a housing mortgage crisis that eventually led to the demise of the Lehman Brothers, and consequently the global financial crisis that ensued.

The economy runs in cycles of booms and busts. Therefore, we can all be certain that a financial crisis will come around sooner or later. It is an inevitable occurrence, and the only thing we can do is to ensure we are prepared for it.

First, we should ensure that we have enough liquidity to survive a liquidity crunch and the ability to invest when the opportunity arises. Second, remove emotion and fear from our investing decisions. A huge collapse in the stock market will undoubtedly cause fear among investors. However, instead of acting on our emotions, we should take a step back, assess the situation before making a rash investment mistake.

Lesson 2: Ride out the cycles

The S&P 500 crashed to a low of 735 in 2009. That was more than 50% off its peak in 2007. But since then, the market has been on a 10-year bull run. Investors who had stayed the course, and rode out the bottom would now be sitting on a return that is close to 100% from the peak of 2007.

The above shows that investors should think about investing in the stock market in terms of decades, rather than years or months. Don’t try to time the market. Investors who trade frequently end up with poor returns because of transaction fees and poor market timing. Instead, realise that Mr. Market can be volatile at times but long-term investors who are in it for the long haul will be rewarded eventually.

Lesson 3: Buy in times of fear

Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.” When the stock market is crashing, and prices can fall below a company’s intrinsic value. That is exactly the time that investors should be thinking about buying.

Of course, it can be scary buying at a time when share prices are crashing. But that is, in fact, the very best time to buy. If you had bought units of an S&P500 ETF at the market bottom in 2009, you would have made around a 400% return in just 10 years.

The Foolish bottom line

The financial crisis in 2008 and the bull market that followed goes to show the long-term wealth-creating power of the stock market. In the short term, there will certainly be times when the stock market is volatile and sudden panic can create sudden and painful dips in prices.

However, that is exactly the time that investors should be thinking of adding to their portfolio. As investors, there are many things we can take away from past experiences. Only through mistakes and pain do we grow and improve. Hopefully, by the time the next financial crisis comes along, we will all be more prepared and instead of panicking, learn to embrace and take full advantage of the opportunity afforded to us.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Jeremy Chia doesn’t own shares in any companies mentioned.