Six things to learn from the financial crisis of 2008

The 2008 crisis was one of the most significant falls of the US economy in history. It didn’t only affect the US economy but had its ripple effects in economies worldwide, including India. The collapse of Lehman Brothers led to disruption in the entire economy as many lost their jobs and investments. These crises lead to a roadmap for financial reforms. 

What led to the 2008 crisis?

2008 crises are considered to be caused due to deregulation of the banking industry before 2004. This deregulation allowed banks to invest their deposits into derivatives. Banks allowed only interest payment loans, which were affordable even for subprime borrowers.

The Fed had increased the rates in 2004, due to which mortgages interest rate also was hiked. Further, when the housing market prices started to fall in 2007 due to the outpass of supply against its demand, the subprime borrowers could not sell their houses and started defaulting in repayment of loans. This led to a decline in these derivatives’ value, due to which interbank loans were stopped. Hence the housing bubble burst and the world witnessed the ‘great recession’ of all times.

Here are the five lessons learnt from the financial crisis of 2008

1.Patience and perseverance in investing

Almost all the investors lost 30-40% of their portfolio’s value. As the market started to crash, people began to panic, selling stocks even in India without adequate due diligence. Some of the investors took a step back to analyse its cause and its effects on their stocks. Thus the investors who stayed put with the stock, which had fallen only due to market sentiment but was fundamentally strong, were saved from booking losses triggered by panic selling. Thus, it is crucial to understand and analyse the situation and how it will affect your portfolio instead of going along with the market sentiments.  

2. Debt should be availed only to the extent you are sure to repay

The crisis took place as the banks had lent money to the subprime borrowers who could not replay the instalments later. The mortgages were sanctioned only based on credit score or some basic policies to increase the lending. As an investor, one should be cautious regarding the debt you can undertake, even if the banks and financial institutions are ready to offer you. On the other hand, the lending institutions should have a robust credit policy to avoid providing loans to subprime borrowers.

3. Don’t try to time the market

All the investors would have wished to time the market and buy the stocks when it is at its lowest and sell at highest. But the entire market, including stock prices, are governed by various factors that one cannot contemplate beforehand. You never know if the current low is the lowest or there is a possibility of further lows and vice versa. A better way is to have a financial goal and invest to meet the goal. One can use the methods of diversifying and rebalancing the portfolio to manage the market risk and maximise the returns.

4. Give some time to your investments

As an investor, it is essential to make an informed decision. Just blindly investing because its trending is not a good way of investment. One should spend time to read, understand and analyse the investment option. It would be best if you had a hold on the events taking place in the markets which are directly correlated to your investments. Taking ownership and actively participating with your money will be good learning and of great help to your assets.   

5. Avoiding the stock market does not mean preventing risk

As investing is risky, so as not investing. You might lose money in stock when the markets are falling, but thinking to avoid investing is another kind of risk. It is like avoiding alcohol for a healthy body but living a sedentary lifestyle for years. You are trying to prevent one habit that triggers health issues, but on the other hand, you are not living an active lifestyle, i.e., in this case, your money. Hence one should make a balanced portfolio consisting of equity, debts, government bonds, gold, fixed deposits etc. A balanced portfolio will help to create wealth and also minimise your risk.  

6. Sleep is better than greed

People, at times, get lured by fast and easy money. Getting into the market to make quick money is never a good idea even though you might earn initially but might lose in multiple folds if the fundamentals of investing are not understood. An investment that would make your nights sleepless is not worth investing. One should know that the market has its inherent risk, and it also operates in cycles of bulls and bears. So give priority to your sleep, and invest with a logical and calm mind. It is said that ‘experience is the best teacher for the wise’; however ‘, experience from others is a better teacher for the wiser’.