Lessons a Crash Can Teach You About Investing

The 2008 crash wasn’t just a market crumble. There are so many lessons you have to keep in mind.

Maybe a few predicted the crash but no one knew when it was going to happen.

Right now, it’s impossible to tell when the next market crash is occur, but it doesn’t hurt to look at past lessons as a reminder or what could happen.

So, in view of the 2008 financial crisis, here are a few lessons to take from.

Expect the Unexpected

The classic “expect the unexpected” is true for the market. Take measures to prepare for the worst because the market reality can be worse that what you imagined.

Too Much of a Good Thing

Watch out when there is too much of a good thing. Markets constantly rising? Loans available to anyone? This environment creates a false sense of security and when things fall back to the mean, it will trigger a crisis.

Control Risk First

Don’t try to milk the last drop from your investments. Always consider risk and downside first over potential returns.

Paying Less is Less Risky

Risk comes from the price you paid for the stock. It isn’t uncertainty or volatility. When there is great uncertainty and it drives prices down, you buy with less risk.

Financial Risk Models are Useless

Market risk models done by computers are a waste of time. Reality is impossible to model. Human logic based on actual and real time facts is more accurate than boxed formulas and numbers.

Don’t Invest for Short Term Gains

Don’t be tempted to invest for short term gain simply to earn something off cash that’s doing nothing. This is a higher risk strategy which increases the likelihood of losses and illiquidity precisely when the cash is needed.

Stock Price is Not an Indicator

The stock price is not the fair value of a stock. People mistake that the stock market is completely efficient. During good and bad times, the stock price is not an indicator.

 Buy When Prices Go Down

Buy when the price is going down. Volume is higher, there is less competition. It’s better to be too early than too late. Don’t be afraid to buy things on sale.

Debt is Evil

Stay away from all forms of leverage. Don’t assume a maturing loan can be rolled over since you have no idea what the capital markets will do.