The financial crisis was in full swing 10 years ago, with the failure of Lehman Brothers marking just one of the many falling dominoes that contributed to a worldwide panic. For those who hadn't gone through the Crash of 1987, what happened in late 2008 was a good lesson about just how quickly major stock market downturns can happen.
Many investors learned a lot from the financial crisis. After years of a nearly uninterrupted bull market, those who had plowed all their capital into high-flying stocks got a lesson in risk management. Some learned the hard way that the funds in which they had invested weren't as safe as they had thought.
Yet most of the lessons I learned came from the aftermath of the financial crisis. The ensuing decade has had a lot of surprises, and many of them represented opportunities that were extremely profitable for those who took advantage of them. I didn't successfully jump on all of those opportunities, but even my failures taught me some valuable things about how to invest. Here are three lessons that could help you in your investing.
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1. It's hard to buy at the bottom
Ten years after the financial crisis, it's easy in hindsight to say just how obvious it was that you should have invested in the stock market when it plunged. Take any list of high-growth stocks and look at how cheap they were back in 2008 and 2009, and it seems like a complete no-brainer to have bought stock.
When you're actually in the middle of the crisis situation, pulling the trigger takes a lot more courage than you realize. For instance, banking stocks have largely done very well in the past decade, but back then, it was far from obvious that the big banks that have recovered so successfully would even survive the year. Indeed, several didn't.
The best move I managed to make during the crisis was to double the amount I was saving automatically every month toward my daughter's college fund. Even that seemed like a really dumb move when the S&P 500 lost another third of its value between September 2008 and March 2009. In the long run, though, it's paid off well, showing the rewards from having confidence in the long-term wealth-creating power of the U.S. stock market.
2. Trends can last a lot longer than you'd think
With many markets, what comes down must eventually go up, and one question that I and many of my peers in the financial-writing business got completely wrong involved when interest rates would start to rise. Unprecedented intervention from central banks around the world to prop up the financial system was invaluable during the crisis, but it also seemed unsustainable in the long run. For years, I warned investors that having bonds in their portfolios could represent a hidden danger, because rising interest rates could cause the prices of bond mutual funds and ETFs to fall. For years, those warnings proved premature, and those who maintained healthy allocations to bonds saw good returns even during years in which the bull market in stocks slowed down.
Eventually, interest rates did start to rise. But that doesn't make my too-early warnings correct. Similarly, the stock market will eventually see a major downturn again, but I've learned not to try to guess exactly when that'll happen or to give too much credit to those who make dire warnings about imminent declines.
3. Listening to opposing views is crucial
Most investors have their own styles of investing. Some like the thrill of high-flying growth companies that can soar into the stratosphere, come crashing down to earth, and end up somewhere in the middle. Others, like me, gravitate toward less exciting stalwarts that have demonstrated their superiority and are now fighting from a position of strength to preserve, defend, and extend their business success.
Since the financial crisis, I've noticed how different styles of investing seem to work better at various times. High-growth investing has been a particularly fertile ground for big winners lately, and I've gone against the grain to look more closely at these stocks. I still haven't made massive investments in the growth arena, but those who have are quite pleased with their results. If you find yourself largely pigeonholed within one corner of the investing world, it's worth it to venture outward and see how other people think about their investments.
Don't stop learning
No matter how much experience you have as an investor, the financial markets always have something to teach you. By being open to the idea that you can learn from the mistakes you'll inevitably make, you'll be better able to improve your investing prowess over time.
