5 Years Later, Lessons Learned

Perhaps the best thing that can be said of the financial crisis that kicked into high gear with the Lehman Brothers bankruptcy five years ago today is that it served as a great, if painful, learning experience--a wake-up call, if you will--for many investors as to the risks inherent in the stock market. Even the implosion of the tech bubble years earlier could not fully prepare investors for the volatility to come during a time when it looked like the global economy just might grind to a halt.

Fortunately, the lessons of that tumultuous time have not been lost on Morningstar.com readers, many of whom offered their own personal takes on what the financial crisis taught them about investing. In some cases hard lessons were learned, with the price paid in dollars or lost nights' sleep. For others the crisis served to reinforce long-held beliefs about asset allocation, making it somewhat easier to ride out the storm.

Readers posted their comments in the Personal Finance forum of the Morningstar.com Discuss boards, and you can read the full conversation, and also contribute your own thoughts, here. Below are some of the many interesting reader remarks.

'Like Nothing Before'
Several commenters talked about just how profoundly the financial crisis affected their approach to investing, putting it into context alongside other major market upheavals in recent history.

"The financial panic of 2008 is one that tested my investing approach like nothing before, including the 1987 crash, the Asian currency crisis of 1997, the tech crash of 2000, the accounting scandals of 2002, and the many 'little' challenges in between," wrote KTInvesting. "So I was prepared to keep to the general themes I had learned from those events: All bull markets end, all bear markets end, things over shoot and then revert. Having this historical perspective helped me endure the constant pain of watching a lifetime's savings and investments relentlessly dissolve over 18 months. But I did not sell and my portfolios recovered."

For some investors, the events of late 2008 led to a lingering distrust of stocks and/or financial institutions.   

"After living through the dot-com crisis, accounting disaster in 2002, and equity crisis of 2008, I have guarded trust in the stock market," said simajima. "I have a fear that the market could evaporate overnight. It is only paper money right now and there are lots of bad guys out there. I know some safeguards have been put in, but I still do not trust it. I am in the market because I need to put my money somewhere."

"The possibility of large losses at the wrong time has become part of my thinking/planning," wrote RARinNC. "[I have] became a more conservative investor but still believe that equity ownership will eventually return to a mean that provides a significant return above fixed income. But have a nagging concern that all of those rules based upon 30-year trends may have changed as a result of fundamental changes in the economy (globalization, concentration of wealth)."

PatrickBr said, "What did I lose? Trust, including in financial advisors--one who showed some wisdom remains but I still am much more careful with him than I was in the past. The truth is that few of us can work magic in the middle of a disaster. I also shed my conventional investing strategies (mutual funds exclusively)--I realized that I had to diversify more, and that meant taking more risk and less, broadening what sorts of investments I hold, hoping that by burying more peanuts in the yard like the squirrels I can survive the next 100-year flood that, knock on wood, might just miss the rest of my lifetime." 

Not everyone looked back on the crisis with remorse, however. Adobe1234, in fact, said it allowed him to become better-educated as an investor. "Before the financial crisis hit, I had already lost interest in active equity investing because I got burned by the tech bubble," this reader recalled. "But the financial crisis presented a huge opportunity--basically everything was 'on sale' again. I started to make purchases again, learned more about hedging/setting stops/assessing value/ having an entry and exit plan--in short the recession motivated me to learn more about investing. So although it was painful, perhaps it has helped me to become a more educated and disciplined investor."

'The Anniversary of My Going Psycho'
One group of posters spoke of making important investment moves just ahead of the Lehman bankruptcy, for better or for worse.

"Today (Sept. 10) marks the anniversary of my going psycho five years ago and shoveling all my stocks and bonds into cash equivalents," recalled FidlStix. "When Lehman hit five days later, I congratulated myself on my wisdom and timing. Today I (along with many others, of course) shamefacedly admit my panicking was a horrible move. Fortunately, I started moving back into stocks early in 2009, so I came out bloodied and bruised but no lasting injuries. The lesson I learned from that, as I watched stocks and equity funds roar back, was even in the worst of markets, if you remember you have a long time horizon for most of your investments, things will get better--in plenty of time for a full recovery and better days ahead. I've resolved never to pull the plug again like I did back on those dismal days."

"Six years ago, my asset allocation was telling me to sell stocks, so I was selling," said Darwinian. "Five years ago, it was telling me to buy stocks, so I was buying.  Now, it has been telling me to sell stocks, so I have been selling. In other words, my investing approach hasn't changed at all. My asset allocation runs the show, and I just execute its orders."

Kayaker said, "The Lehman bankruptcy coincided (to the month) with my retirement from full-time work so a change in investing style was inevitable at that time anyway. However, I missed the year-off I wanted before starting part-time work. I now keep more cash and safer short-term investments than I think I would have planned to before I retired. I am also quicker to pull the plug on investments that start to go south. I would rather make 6% in a market that is up 10% than try to recover from a portfolio that follows the market down a full 20% or more at this stage of my life." ​

'Scared the Pants Off Me'
Several other posters echoed kayaker's safety-first mind-set coming out of the financial crisis. One of them was DNAnextgen, who wrote, "I am getting closer to retirement and after 2008 I am spending more time on proper allocation of resources and being sure to rebalance on a regular schedule. By sheer luck, I managed to come out ahead after the 2008 trouncing, but the experience scared the pants off me. I am much more careful about the companies in which I invest and cash is now a larger component of my portfolio."

Also advocating keeping short-term money away from the market was DrBobb, who wrote, "We now keep enough money outside the stock market so that we could maintain our standard of retirement living even if the stock market went to zero. This eliminates the need to even think about selling if the market falls."

For texastrails the market meltdownserved as a reminder that sticking with investing basics can serve you well if the market turns south.For this reader, the main lesson learned was"that by sticking to your plan, adjusting according to the allocation model that is appropriate for your goals, and investing only in fund managers with proven long-term successful records, in funds that have Morningstar ratings for low risk and high performance, and letting them do their work, you can ride through most anything and come out just fine. And sleep fairly well in the process."

'It Didn't Change Our Approach, It Reinforced It'
Several other posters said the crisis confirmed that their investment plans were on solid footing.

"I have not changed anything about how I invest," said Kenster. "I stuck to my investment strategy throughout the financial meltdown that happened five years ago. And the strategy was having an appropriate asset allocation, being diversified, and using index funds because of their low expenses. I never did anything in response to the 2008 crisis, and very glad I stayed the course."

"It didn't change our approach, it reinforced it," wrote DouglasJohnson. "Warren Buffett's 'Be greedy when others are fearful. Be fearful when others are greedy.' There were lots of fearful people then, so we were greedy. Bought lots of good, solid companies. Got lots of good, solid returns since."

Jim1947 also mentioned the Oracle of Omaha's influence on his decision-making process once the crisis hit. "I started salivating when Lehman tanked," he said. "I knew their demise would take the market to a 'Buffett' buying opportunity of a lifetime. In this case, even though the market continued crashing, I just waited because I knew the crash would eventually end. Or civilization would collapse into anarchy. Always remember, things that can't go on forever, won't."

KitCat wrote, "I learned that I don't panic in a down market, stayed the course. I looked at our statements but knew everyone was down and didn't think about it much. My biggest changes are in buying individual stocks: 1) looking at the amount of debt a company has and 2) their payout ratio. I want to know that the company has the financial strength to handle a longer down economy. I feel the days of companies just borrowing like crazy, same as the consumers and governments were doing, are over, at least until they forget that lesson again."

'A Perpetual Reference Point'
Whether investors learned through action or inaction during the 2008 market downturn, its influence five years later is undeniable. Abqtod, in fact, questioned whether investors are too fixated on 2008.

This reader wrote, "One change obvious in many posters here on [Morningstar.com's Discuss forums] is that 2008 has become a locked-in and perpetual reference point from which all investments are measured. When someone mentions a fund as a possible investment, there inevitably occurs follow-up posts stating how that fund did in 2008. A fund that has been great in all years but 2008 will be charged with the crime, 'Did terrible in 2008.' Any fund that did well in 2008 earns an automatic gold star, 'Did not-so-bad in 2008!' 2008 created a black hole that threatens to pull all future investment thinking into its abyss. It takes an extra degree of work to think about what caused 2008 and to evaluate if those circumstances are more relevant or less relevant today, especially when it applies to a considered investment."

For legions of investors burned by the financial crisis and its impact on the markets, however, the sting may never truly go away. 

Comments left by artsdoc were typical. "Yes, the financial meltdown has absolutely made an impact on how I manage my portfolio," artsdoc wrote. "I am a cold-hearted investor and have removed 99% of my emotion when it comes to investing assets. Between 1987, 2000, and 2008, I have been properly educated on how volatile the market can be, what you can control, and what you cannot control. I am in my 50s and am in the accumulation stage. As I rapidly approach my retirement years, I am sticking to my investment plan and will not venture into riskier assets in search for a higher yield or return, no matter how tempting it might be or how loud the financial news media might be screaming. As bad as 2008 was, there is no way to know if there's worse to come or if it will be smooth sailing. The only thing I can guarantee is that every investor will experience a few brutal bear markets in his/her lifetime and that no one can accurately predict when that might be."