When the market collapsed on 2008, Wall Street received a big blown. Six years later, the recovery is obvious but lessons endure for main investors on the street. On September 15, 2008, the venerable investment bank Lehman brothers filed for bankruptcy and Wall Street was about to implode. It was the first time for this institution to reach such critical state since the Great Depression. Within days, the federal government bailed out the insurer AIG while pushing to the brink other investment banks including Merrill Lynch and Morgan Stanley. Amid panic, Bank of America bought Merrill Lynch. There are numerous lessons from this tragic situation, especially for investors.
The price of stocks has a big importance. In 2007, the price/earnings ratio for stock markets roe over 24, based on ten years of average benefits. However, due to the following global financial panic, the stock market lost 57% of its value from October 2007 to March 2009. When the price/earnings ratio went down to 13 by March 2009, it was a signal to buy opportunities. If you were an investor at that time and you decide to buy, you would have enjoyed a return of 230% ever since.
Another lesson is to avoid banking on any one group of stock, even financials. Since September 2011, financials have been among the best performers of market. Their values doubled in three short years. The rule of Warren Buffett saying to be greedy when others are fearful and fearful when other are greedy, helped wise investors to make big profits after the crisis.
This crisis showed that buy and hold works eventually. Investors who pulled out their funds from stocks lost at the end. On March 2009, the stocks return was 230% so far. If you were an investor and kept the basic rule of 70% equity/30% bond at the beginning of the crisis on September 2008, you would have earned an annual return of 9% by keeping your place in the course when things got scary.
Do not think of your stock as stable or conservative. The crisis saw blue chip stocks of venerable investment bank plunging dramatically. If you are an investor, take on account the real nature of your stock as unpredictable and volatile creatures. Do not take risks with your savings when stock fall because cash is not always stable.
In order to deal with an unpredictable crisis, vary your work in different ways. You will benefit by parting your bets globally.
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