The Smart Investor
    Facebook Instagram
    Wednesday, August 10
    Facebook Instagram LinkedIn
    The Smart Investor
    • Home
    • About
      • About Us
      • Careers
    • Smart Investing
      • Getting Started
      • Investing Strategy
      • Smart Analysis
      • Smart Reads
    • Special Free Reports!
    • As Featured on BT
    • Our Services
      • Our Services
      • Subscribe now!
    • Login
    • Cart
    The Smart Investor
    Home»Investing Strategy»4 Investment Lessons Culled from the Global Financial Crisis
    Investing Strategy

    4 Investment Lessons Culled from the Global Financial Crisis

    For those too young to recall the horrors of the Global Financial Crisis, here are several noteworthy lessons to pay attention to.
    Royston YangBy Royston YangNovember 3, 20215 Mins Read
    Facebook Twitter LinkedIn Email WhatsApp
    Share
    Facebook Twitter LinkedIn Email WhatsApp

    It has been almost 12 years since investors witnessed a punishing bear market during the Global Financial Crisis (GFC) of 2008-2009.

    The absence of an extended bear market may have lulled many new investors into a false sense of security, as they had never experienced the turbulence associated with persistently low valuations and a sharp drop in confidence.

    While no one should invest with the constant expectation of a bear market or downturn, I feel it’s useful to examine the GFC for learning points.

    Having been through the GFC first-hand, and being invested throughout the entire period, I thought it would be useful to share investment lessons gleaned from this once-in-a-lifetime event.

    Companies may look cheap … until they go bankrupt

    During the crisis, strong ripples reverberated through the globe as the entire US financial system was on the verge of collapse.

    As funds from banks and financial institutions seized up, credit was made unavailable almost overnight.

    This event resulted in severe stress for companies that could not roll over their loans as there was insufficient liquidity in the system.

    Even popular REITs were not spared and faced a cash crunch.

    The lesson here is that although certain companies may look decidedly cheap during a bear market, investors should be wary of those with high debt levels or imminent refinancing concerns.

    Some companies are literally “cheap for a good reason” as the market is pricing in the probability of bankruptcy should they be unable to obtain financing to carry on daily operations.

    Avoid borrowing to make quick gains

    There were instances where a few bold but ultimately foolish short-term traders borrowed money to short the market. It seemed like a good idea because the market was only heading in one direction at the time – down.

    What investors may not be aware of is that bear markets are periodically punctuated by sharp reversals or upswings, and these unpredictable fits that can swiftly kill off traders with leveraged positions.

    Keep one simple advice in mind: do NOT borrow money during a bear market as its sharp swings may bankrupt you.

    Invest slowly and always keep cash handy

    As bear markets can last anywhere from 6 months to 2 years, it’s advisable to space out your purchases to ensure that you have sufficient savings.

    It’s useful to keep some cash handy at all times.

    The greatest mistake an investor can make is to go all-in at the beginning of the bear market, only to see valuations collapse further to rock-bottom levels without having any cash handy to average down.

    Friends of mine have suggested a mechanical method to make it easier to allocate funds during a bear market, and this shall be tagged to the % drop in the market.

    An example would be to commit 10% of your funds when the market falls 5% and another 10% for every subsequent 5% drop. Of course, this method can be tweaked to suit an investor’s personal tolerance level and preferences, but it does serve to take emotions out of when to inject money into the market.

    Manage your emotions

    Speaking of emotions, this is probably the toughest aspect for investors to manage through a bear market.

    On a personal note, I felt discouraged and disheartened when I witnessed the value of my portfolio plummeting, and had to be constantly comforted and reminded by my loved ones that things would eventually get better.

    During those dark days, there was no assurance that any improvements would come.

    As such, it can be extremely tough to sit still, watching as significant amounts of unrealised losses build-up for an extended period of time.

    That is why the support of friends and family is crucial during recessions and bear markets.

    If we go at it alone, it can be tough to brave through an extended fall in share prices without a word of confidence from the people around you.

    Another option is to hang out with fellow investors who also share a long-term philosophy and are veterans who have been through prior downturns (for example, the Asian Financial Crisis back in 1997-1998).

    These people help to put things in perspective and can allow an investor to enjoy a good night’s sleep.

    Get Smart: History rhymes

    In the past 12 years, there have been periods of time where markets dipped precipitously. However, the recovery has usually been swift, as compared to the GFC.

    As prolonged declines are rare and uncommon, not many investors may have the opportunity to experience and learn from them.

    The GFC is a worthy event to study as there could be valuable lessons that can be applied forward.

    The new GFC-like event might not happen the same way. But as the saying goes: history never repeats itself, but it often does rhyme.

    Here are 5 cash-rich companies so healthy, they can pay you dividends for life. The names of these SGX stocks are in our special FREE report. Download it here and start building your dream retirement portfolio today!

    Follow us on Facebook and Telegram for the latest investing news and analyses!

    Disclosure: Royston Yang does not own any of the shares mentioned. 

    Yahoo
    Share. Facebook Twitter LinkedIn Email WhatsApp

    Related Posts

    5 Singapore REITs That Upped Their DPU in August

    August 10, 2022

    3 Singapore Blue-Chip Stocks Raising Their Dividends Before National Day

    August 9, 2022

    Sembcorp Industries Doubles its Interim Dividend: 5 Highlights from its 1H2022 Earnings

    August 9, 2022
    Facebook Instagram LinkedIn Telegram
    • Careers
    • Disclaimer & Privacy Policy
    • Subscription Terms of Service
    © 2022 The Smart Investor. All Rights Reserved. The Smart Investor, thesmartinvestor.com.sg, an investment education website managed by The Investing Hustle Pte Ltd (Company Reg No. 201933459Z) is not licensed or otherwise regulated by the Monetary Authority of Singapore, and in particular, is not licensed or regulated to carry on business in providing any financial advisory service. Accordingly, any information provided on this site is meant purely for informational and investor educational purposes and should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or class of investment products. Rather, the information is presented for the purpose and intentions of educating readers on matters relating to financial literacy and investor education. Accordingly, any statement of opinion on this site is wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader. The Smart Investor does not recommend any particular course of action in relation to any investment product or class of investment products. Readers are encouraged to exercise their own judgment and have regard to their own personal needs and circumstances before making any investment decision, and not rely on any statement of opinion that may be found on this site.

    Type above and press Enter to search. Press Esc to cancel.