Investing Lessons from Past Financial Crises: What We Learned
November 21, 2023
What we’ve learned about investing after the past few years
Looking at the global markets in the past few years, it is evident that it’s been a turbulent period for the economy.
The coronavirus pandemic led to significant disruption in almost every major sector, resulting in an unprecedented level of market volatility.
The Russia-Ukraine conflict has exacerbated the volatility of the market condition causing massive instability in financial markets across the world.
The US Federal Reserves post-pandemic interest rate hikes have significantly contributed to increased uncertainty.
The China property crisis and the unstable relationships between US and China have also created a lot of uncertainty in the global markets.
The cryptocurrency and NFT project crashes following the catastrophic implosion of the cryptocurrency exchange FTX and the failure of the Terra and Luna system, Voyager, Three Arrows Capital, BlockFi, Celsius (the list goes on…)1
While this has undoubtedly been a difficult time for investors, the markets have also served as a great teacher, offering valuable lessons for us to learn in order to succeed in the future.
Historical Market Overview
Here’s what we’ve learned from the past:
Bull Markets Don’t Last Forever
Even the strongest stocks can be adversely affected by broader macroeconomic factors.
The financial crisis of 2008 (otherwise known as the Great Recession) was a painful reminder of the cyclical nature of the stock market, and the fact that not every year guarantees positive returns. 2022 is the second year the S&P 500 has had a negative year since the financial crisis.
However, the long-term investor can prevail if they remain patient and focused and continue to invest in stocks with the right strategy.
Bear Markets Hide Great Opportunities
When the market plummets, investors can also look for value investing opportunities. This involves looking for stocks that are underpriced by the market and buying them in anticipation of price appreciation.
Generally, value investors focus on stocks with a low price-to-earnings ratio and try to buy when prices are low and sell when prices are high.
By implementing one or more of these strategies, investors can lower their cost and maximize their potential for profit in a volatile market.
Dollar-cost Averaging is the Way to Go
Dollar-cost averaging allows investors to better manage their risk and is a great long-term strategy. Instead of trying to time the market, which can be difficult and costly, investors can spread out their investments over time.
Doing this reduces the potential for significant losses, as the average price paid for a security will be lower than if it were bought all at once.
Dollar-cost averaging also reduces market timing risk, as investments are made regularly regardless of market conditions.
Additionally, the fixed nature of the investments means that investors receive the long-term rewards of compounding returns. When done systematically, dollar-cost averaging can provide a steady stream of income while also allowing investors to benefit from potentially rising markets.
By using dollar-cost averaging, investors can reduce the risk associated with trying to time the market and instead focus on building wealth over the long-term.
As the saying goes - “It’s not about timing the market, but about time in the market.”
Diversification Matters
Never put all your eggs in one basket.
In 2022, the financial market’s performance has proven that diversification extends beyond just stocks and bonds. Take the Russia-Ukraine conflict for example, with the introduction of economic sanctions against Russia, investors outside Russia lost access to Russian companies owned via shares and investment funds. This resulted in those investors incurring major losses.
Investors who diversified their investments across different asset classes (equity, bonds, commodities, etc.), different regions and different industries came out of the pandemic much more well-off than those who put all their eggs in one basket.2
Reset in Equity Valuation
Year 2022 has seen a decline in valuations for some of the most heavily valued segments of the market. Traditional growth names in the tech sector were all down more than 20% year-to-date.
But this is a potential bright spot.
New opportunities have emerged in areas like value-oriented stocks, energy, utilities, consumer defensive and dividend players.3
Buy what you understand
When it comes to investing, it’s important to not get carried away by the FOMO and invest in things that are hyped up. The principle of “Buy what you understand” focuses on investing in assets, businesses, or industries that you understand.
One of the most prominent proponents of this philosophy is Warren Buffett, the legendary investor. During the late 90s, he notably refrained from investing in the tech boom, even as many were flocking to tech stocks. Simply because he couldn’t see a path to profitability for many of those businesses and couldn’t understand the industry well enough.4
This turned out to be a wise decision, as the tech bubble eventually burst, causing massive losses for many. Though some people may have made tremendous amounts of wealth from investing in internet companies in the early days; this didn’t faze Warren - his principle was simple and he stuck to it.
With some of these high risk opportunities (as what we’ve seen from cryptocurrency) - it’s important to only invest what you’re prepared to lose, understand the underlying principles and the technology behind them; and don’t be afraid of “missing out”. There’s a lot of opportunities out there.
The Takeaway
Every crisis presents itself with opportunities, and while things may have seemed bleak in the investment markets and global economy, these ups and downs are totally normal. The winners are often those who stick to a consistent investment strategy, resist the FOMO, take a long-term approach and focus on the bigger picture.
In the age of frenzied trends and speculative bubbles, it's vital to remain grounded and stick to investments that you can truly comprehend. Diversification, careful risk management, and a long-term perspective are other crucial strategies for weathering the storm.
While crises can bring uncertainty, they also offer opportunities, and those who maintain a consistent and informed approach are more likely to thrive in the ever-changing landscape of investment.
We hope this article helped you in your investment journey. Share this with a friend who might need it too.
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