Key Lessons Investors Can Learn from the 2008 Financial Crisis
The 2008 financial crisis hit the world like a storm. It blew up stock markets from one end of the planet to another. Set in motion by the bankruptcy and collapse of the investment bank, Lehman bros., it left a lot of people exposed to a huge amount of risk. You have to remember that a lot of the stock market at that time was financed by borrowing to fund stock positions.Whenever you are relying on credit for investment purposes, you're taking a massive risk. Instead of bankrolling your financial investments through the solid appreciation and gain of your previous investments, you are hoping that the stuff won't hit the fan and you would have to face margin calls. This is precisely what happened with the 2008 financial crisis. Bank had so much toxic debt. Thanks to mortgage-backed securities that the banks started to distrust each other. They did not know which of their financial partners would go belly-up next. This is why it is crucial to learn from key lessons from the 2008 financial crisis. This collapse is part of a larger global pattern. The 2008 financial crisis was not the first financial correction to hit Wall Street nor would it be the last. It is to your advantage to learn the key lessons investors can take away from the 2008 financial crisis.
There Are Warning Signs
It’s very tempting to think that a financial crash happens in a vacuum. It’s very comforting to pretend that stock-market corrections are anomalies or blips on the greater financial radar. Nothing could be further from the truth. Just like in physics where everything that goes up must come down. The same goes with stocks, bonds and other financial securities. The truth is that just like any ordinary market, the stock market can get overheated. in other words it attract investors that don't bet based on quality and long-term value but based on short-term appreciation. In other words instead of attracting people looking to build long-term value and long-term security, the stock market attracts an unhealthy level of gamblers. This happens with markets' life-cycles. Once that level of speculation reaches crisis proportions, corrections can happen. However, there are warning signs before the inevitable fall. Before the 2008 financial crash, there were several times when the market dipped dramatically because of potential credit issues. It’s not like the market crash happened out of nowhere. As early as several quarters before 2008, banking stocks crashed several times. If you're paying close attention to these at intraday movements you would quickly realize that something strange was often afoot. The good news is that there are warning signs. So whether we are looking at the 2008 financial crash, the great depression, the great crash that started the great depression in 1929, or the 1987 crash, there are warning signs.
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Pay Attention to Volatility
Usually, volatility in stock markets is a good thing. Because, unless you are buying and holding for a long period of time like warren buffet, you can actually make a lot of money trading on volatility. While it may seem that a stock only appreciated 2% in a year, it can go through wild gyrations that can result in several multiples of that eventual return. In other words, for a stock to achieve a 2% return year-on-year in a fiscal year, it could have gone through several up and down motions where it dipped 10% then went 12%. These highly volatile stocks are actually great place if you trade on momentum. The greater financial market also has a level volatility. In fact, there is an index called the volatility index or VIX. Pay attention to this index. It is your friend. if you want to make money off the stock market and want to avoid potential crashes, pay attention to the VIX.
Followed with a Nice Spike Up
Another thing that we can learn from the 2008 financial crisis is that as depressing the massive crash and equity values maybe, there is always a nice pike up once the market crashes. It is as predictable as the tide rolling in and rolling out. This is good news because even if you lose money with the initial crash, you can liquidate diversified investments in precious metals to cash in on blue-chip stocks that got temporarily depressed. Make no mistake about it. When there is a crash, there is going to be a nice spike up. Ride this spike up so that you can either recoup some of your losses or actually make a decent chunk of change.
Diversification Is Key
Another key lesson to take away from the 2008 financial crisis is that diversification is key. It is not preferred. It is not a nice thing. It is not optional. It is absolutely crucial. If you want to survive a nasty financial shock like the one that we had in 1997, 2008 and 1929, then diversify. By this, we are not just talking about buying different stocks but rather about buying different assets and diversify into bonds, precious metals and stocks. Moreover, even in a diversified portfolio, diversify within that portfolio. For example if you diversify in precious metals, put some of your assets into gold, silver, platinum and palladium. Many different assets move in a different way especially during a market recovery. It’s very important to position yourself so that you can make the most out of these differences.
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Diversified Assets Free You up to Benefit from Spikes
A lot of people made a lot of money when the 2008 financial crisis hit because they diversified into the right investments. Precious metals held their value when the rest of the market and the economy crashed. You can then use this stored value out to give you the necessary capital to buy up blue-chip and other high-value stocks that were temporarily depressed. This way you can ride the market up as it temporarily recovers then ride it back down when it crashes again. In fact the best fund managers were able to ride the market up and down several times yielding millions of dollars each time. It’s all about diversification and more importantly it's all about positioning yourself in such a way that you can make money regardless of whichever way the market moves. This is what separates expert investors and money-makers from people who just got lucky.
The 2008 financial crisis and yielded lots of key lessons that investors should learn from. These lessons could not just help people avoid suffering massive losses during market correction but also help them position of their assets in such a way that they can make money during a financial crisis.