We are closing in on the one-year anniversary of the collapse of Lehman Brothers.
I’m looking for individual investors to talk the impact of the market meltdown. Since last fall, what lessons have you learned as an investor? What’s your biggest regret? And, are you doing anything differently now with your portfolio than you did prior to the market meltdown last September?
Please let us know your thoughts. (If you include a real email address when you comment, which won’t be published, I might follow up offline.)
Incidentally, Paul Hynes, principal of Burns Advisory Group in San Diego offers his “Lessons of the Fall” based on Lehman’s collapse last year. (I like Lesson #1 the best.)
Lesson #1 – Avoid excessive risks Smart people can make dumb decisions, especially when they’re arrogant enough to believe the laws of investing don’t apply to them. One such law is that leverage, the act of borrowing other people’s money to invest, can work both ways—for you and against you. Lehman financed $600 billion worth of assets with only $30 billion of equity. That’s like you putting five percent down to buy a home. It only takes a minor drop in prices to wipe out all your equity—and you still have your mortgage payment. Clearly, this is an example of taking excessive risk.
Lesson #2 – Stay broadly and intelligently diversified Lehman placed too many of its financial eggs in one basket: mortgages. When the mortgage securities market went bad, it had nowhere to hide. When you concentrate your investments in any single company, industry, sector, or country, you run the risk of being hurt by a catastrophe like the collapse of the mortgage securities market, Bear Stearns, WorldCom, Enron and others. In the end, there’s the chance you won’t be rewarded by the market, and maybe even lose big. Obviously, a broadly and intelligently diversified portfolio of well chosen investments still carries some risk. But we would argue that this is the type of risk most long-term investors ought to assume. When you take the risk of owning a cross-section of the global economy, you have the opportunity to be rewarded over the long-run. Of course, there are no guarantees, and even a diversified portfolio can still lose money, but diversification mitigates the risk.
Lesson #3 – Markets will move against you It’s not a matter so much of if markets will suffer declines, it’s when, how much and for how long. Suffering through these down cycles is the price that you as an investor pay for the opportunity to earn attractive returns. Unfortunately, you can’t have one without the other. If we learn from lessons #1 and #2 above, then we hope to weather the storm of volatility and expect to come out of it in good shape for the recovery, when it occurs.
What do you think? What lessons have you learned? What mistakes do you regret since the market crashed? Here’s your chance to let others learn from your experience.