For the five year period 2003 thru 2007, the S&P 500 averaged slightly over a 13 percent return per year. What a great period for stocks as investors shook off the prior three-year slump in the equities markets, with high expectations of returning to continuous double-digit stock market returns. So, what exactly happened in 2008? How could one of the largest financial institutions (Lehman Brothers) collapse so abruptly? Why didn’t we realize sooner that national real estate was on a roller coaster ride for disaster or that leverage was the evil step-sister?
As 2009 shapes up to be a much more productive year for equity investors, many financial professionals are stepping out of hiding and sharing some of their stories from the market crisis.
Let’s take a look at some of the lessons learned from the 2008 crisis and the advice from some of these professionals in the financial industry, as they shared their thoughts in recent trade magazines…
“The year 2008 was the second worst in history, back to the 1800’s even. It was a surprise that we would return to that kind of volatility, but it happened. Now it’s damping down. We’ve learned another lesson and we’re going to pay for it, plus all kinds of regulation and excess spending.”
-Roger Ibbotson, Professor of Finance, Yale University- New Haven, CT
“When you’ve had a crisis like the one we’ve had over the last year and a half, you have a reversion to simple business models. Index funds will grow. Money markets will grow. Discount brokers will grow. Fundamental simple things will grow. What won’t grow are collateralized mortgage-backed securities, structured debt deals, and the IPO market.”
-Charles Roame, Managing Principal, Tiburon Strategic Advisors, Tiburon, CA
“You should resist the temptation to go farther out on the risk spectrum to get a little more yield. Or at least if you do that, you had better make sure that you’re hedged or well diversified. Investors learned the risk lesson when the internet bubble burst and have relearned that lesson.”
-Tom Bradley, President- TD Ameritrade Institutional, Jersey City, NJ
“We have truly global markets and regulation must be global. How did collateralized debt obligations get so big and why did we not know who had them? Are people too leveraged? If derivatives had been registered, we would have known what dangers were out there and people could choose whether to do business.”
-Muriel Siebert, Founder- Muriel Siebert & Co., New York, NY
(All of the above quotations were taken from Financial Planning Magazine, “What We Learned from the Market Collapse”, September 2009, pp 62-69.)
“On the bond side, I’ve learned not to do corporate ladders anymore. I realized I can’t trust the ratings anymore. Until they change the way bonds are rated and I can have confidence in Moody’s, S&P and Fitch, I’ll use bond funds and not ladders”
- Richard Kahler, President- Kahler Financial Group, Rapid City, SD
“The premise for making changes is that the pillars of traditional investment management- buy-and-hold, diversification, asset allocation- failed during the panic of 2008. I don’t hear anything behind that accusation other than the fact that values declined. When you look at the alternatives being suggested, their values declined too. Hedge funds designed to provide absolute returns lost money. Everything went down.”
- Dan Moisand, Principal- Moisand Fitzgerald Tamayo LLC, Melbourne, FL
(The above two quotations were taken from Financial Advisor Magazine, “Lessons Learned- What the Market Upheaval has Taught Advisors”, Jeff Schlegel, September 2009, pp. 62-68.)
Nine Pointers to Avoid Future Mistakes
When considering the things that I’ve learned throughout the market shakedown, I’ve summarized my lessons in nine simple points to remember:
- Stay within your Risk Tolerance- while rising markets are an easy temptation to get more aggressive, keep in mind the downside risk and why you elected your model in the first place.
- Don’t be Tempted to Chase Returns- all of us want to take a ride on the hottest performing investments, but chasing after the hot stock can easily blow up in your face.
- Diversification and Rebalancing still works- there are lots of negativists out there claiming that diversification is dead. Fact is… 2008 was a very unusual year- everything lost money. Diversification was still able to reduce full exposure to one sector.
- Think Long-Term, not short-term- markets recover and life goes on, they always do. Stay in the game and you will eventually recover your losses, pullout of the market and you’ll miss out on the most of the recovery.
- Maintain appropriate Cash Reserves- if you’re taking withdrawals from your portfolio, keep 12 to 18 months of cash or readily liquid assets to prevent you from having to sell out at a bad time.
- Don’t over-leverage yourself- why so many home foreclosures? Too many people borrowed funds to invest in the hope that they could make some quick cash. Make sure your debt is at a controllable level.
- Seek uncorrelated assets for your portfolio, use hedging strategies carefully- alternative assets such as gold and other commodities tend to have low correlation to US stocks, use them wisely and sparingly. Make sure you understand them and that everything is transparent.
- Take your Risk with Equities, not on the fixed income side- equities are risky, but your bonds are typically used for safety. Make sure your bond portfolio is short-term and investment grade quality. Don’t take unnecessary risks.
- Utilize Trailing-Stop-Loss orders to minimize losses- equity investments can be protected against substantial loss by adding trailing-stop-loss orders on the position to automatically sell off if the position hits a low target price.
There are many lessons to have learned from the fallout of the global stock markets in 2008 as well as the first two months of 2009. Realistically, most investors held their ground, got beaten up in 2008, and have now experienced several months of positive returns during the recovery stage. Markets are risky, but we all love the thrill of seeking higher returns. The big question is … can you withstand the future volatility of the markets? Diversify properly and prepare for the unknown, who really knows what’s in store for the future? |
