In 2008, the economic crisis prompted the U.S. Federal Reserve to pump massive dollars stimuli into the market economy, that shifted pushed bond yields to their lowest point in seventy-five years. This forced many investors to shift from bond surrogate investments like real estate, high-yield bonds, high dividend paying stocks, and levered loans. With the proliferation of these products, it has brought different risks to investors such as regulatory changes, expensive valuations, and liquidity issues. Stricter capital rules are introduced by governments on U.S. and international banks in order to lower the chance of bank failures in the future.
The average American investors can learn from the lessons brought about by the 2008 economic crisis and they can also be applied today to be able to survive another market crash if it does happen. Be skeptical about the new product you are investing. The credit markets’ record set of innovations presaged the 2008 economic crisis. Collateralized debt obligations, increased leverage and sub-prime asset-backed securities magnified a contained real estate correction into a wider financial collapse. All with their own risks, we can see many new alternative asset classes, products and strategies. It is important to plan ahead to prevent you from forcibly selling when market liquidity starts to dry up. In order to avoid selling securities at relatively fire sale prices, it is important to own high-quality investments and utilize diversified and effective high-quality fixed income investments which are mixed with appropriately priced stocks. It is also important to be aware of the impacts of debt levels because high levels of leverage or debt can adversely affect markets. You don’t have to panic or sell your securities when the outlook is not good as long as you have an adequate financial plan because markets will recover. Look for warning signs in terms of market valuation and failure to appreciate investment risk.
The 2008 economic crisis is a reminder for average American investors to embrace investments that can withstand the test of time. It is critical for investors to learn from the lessons of history, creating a better portfolio, respecting the past, and opening great business opportunities of the future that can withstand the challenges of tough markets. It is not good to invest in a company just because of it net assets, you need to also closely monitor those assets if they were brought or earned like mergers or acquisitions. Look at the board of directors of the company as well as upper level management. It is essential to know the person managing the financial aspects of the investment or business you’re planning to venture in. Many companies quickly fail if managers are either less than above board or inept in their dealings. Beware of any get-rich-quick schemes or overnight wealth.