Important Lessons from Financial Crisis

There is a talk of US Crisis and European Crisis on every financial street. When we talk about India, the financial crisis of 2008 and slowdown in 2011 has made us taught how to behave while taking investment decisions. While understanding the various reasons for financial crisis, there is urgent need to take lessons from the financial crisis of 2008 and slowdown in 2011. The various learnings from financial crisis can be:

You can’t expect a secular bull run

Period of 2003-2007 was a period of secular bull rally for Indian stock markets. Markets went from 4000 Sensex levels to 21000 levels in just 4 years. Everybody was expecting a further rise at that point of time. But just the opposite thing happened and markets fell to 7700 odd levels in next 8 months. An important point to learn here is you can’t expect a secular bull rally in equity markets for years together. There would be periods when markets will be in an uptrend zone and numerous periods when markets would be in a downtrend zone. Avoiding panic during downtrend and greed during uptrend is the key learning here.

Avoid Fear of Markets Becoming Almost Zero

Whenever a financial crisis takes place, a lot of people become over bearish about the economy as a whole and tend to sell their investments in extreme panic. But what I learnt from financial crisis is that one should not expect his investments to become almost zero. After the effect of global financial crisis in 2008, a lot of investors sold their investments at rock bottom prices in a fear that their investments would become nil if they hold it for more time. But the stock markets gave more than 100% returns in a year after that and some stocks rose by almost 400%. I also want to make my readers remind of “Great Depression of 1929”. Even during those times the stock prices didn’t become zero.

You must have debt in your Portfolio

One of the important learnings from financial crisis of 2008 was that one must have debt component in his/her portfolio which will save an investment portfolio during adverse times like f 2008 and 2011. If you are maintaining 70:30 as equity to debt component in your portfolio, it means 30% of your investment portfolio would keep getting 7-8% annualised returns as against getting hit by 50-60% in financial recession

Invest in Quality Stocks only

Don’t take the risk of investing in penny stocks or stocks with the value of less than Rs 20 as these companies are the worst hit stocks during any financial crisis. If you are not good at researching stocks, look forward for the option to invest in equity mutual funds where near to 100% of your capital is invested in stocks under the guidance of professional and experienced fund manager who understands market better than you. Invest in a portfolio of stocks across various sectors rather than investing in a single stock.

Don’t try to time the volatile markets

Every retail investor expects the markets to fall further during the falling markets during financial crisis. In such a time, don’t try to time the market by delaying your investment decision and in the end losing out on an opportunity to invest at lower levels. Try to invest in parts at every fall of the market and average out your investments

Stock Markets Over React to Bad News

As we can see during 2008 crisis in US, the stocks over reacted to the bad news in United States and the stocks fell more than expected and thus offering ample opportunities to investors to invest at lower levels and make good money.