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5 lessons learned from the financial crash of 2008

By
Nicole White
June 7, 2018
13 min read

With the current bull run in equities in the United States in its 9th year, we’re approaching the current record of 10 years (to beat 1990-2000). This has some people worried about an eventual pullback and even recession.

re·ces·sion
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

"We think the Fed will continue to tighten pretty steadily over the course of the next couple of years or so, but we're starting to think that the end of the cycle, you can start to see it now. So we're saying 2019: recession," Robin Bew, CEO of the Economist Intelligence Unit, told CNBC on Tuesday.

We’ve been here before, we know what to look for. 2008 saw the worst financial meltdown since the 1930s. The housing crash led to the federal government's takeover of mortgage giants Fannie Mae and Freddie Mac – whose dividend-paying stocks were a cornerstone of many traditional retirement portfolios.

Next up were the investment banks. Lehman Brothers collapsed under the weight of its bad mortgage-backed bets, while Merrill Lynch was forced into the hands of Bank of America.

Then came news that insurance giant AIG faced a credit crunch, leading to an $85 billion government bailout (which turned out to be just the first installment). This followed massive stock market losses across sectors, with banks and financial institutions among the worst hit. The Dow plunged nearly 780 points on its way to an eventual 5,000-point end.

That which doesn’t kill your nest egg can make you smarter about your investments. 

Here are 5 lessons we learned by making it through the financial crisis of 2008.

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.

Financial stocks are risky

Financial stocks are sensitive to interest rate changes. Banks can be highly leveraged, very competitive and difficult to run businesses. Unless you have deep experience and knowledge of the industry, consider investing in safer industries that you understand.

Don’t invest for short term gains

Don’t be tempted to invest for the short term simply to earn something from cash that’s doing nothing. This high-risk strategy increases the chance of losses and illiquidity right when you need the cash.

Don’t time the market, time yourself

Every year that passes is another year you get closer to retirement. Over time, this will require you to dial back the percentage of your nest egg that you hold in equities.

Stay the course, double down

The market will come up, don’t pull out your money. In fact, if you’re able, allocate more toward stock purchasing.

What does this mean for you?

Not convinced? Take a look at what a $1,000 investment into some popular stocks would have turned into had you invested in them in 2009:

Apple: $7,407.06

Share price May 1, 2008: $24.99

Share price May 1, 2018: $185.16

Compound annual growth rate: 22.17 percent

Netflix: $74,394.38

Share price May 1, 2008: $4.52

Share price May 1, 2018: $326.26

Compound annual growth rate: 53.87 percent

Alphabet (Google): $3,626.72

Share price May 1, 2008: $292.13

Share price May 1, 2018: $1,059.46

Compound annual growth rate: 13.75 percent

Starbucks: $7,197.57

Share price May 1, 2008: $7.98

Share price May 1, 2018: $57.45

Compound annual growth rate: 21.82 percent

That goes both ways -- It turns out being associated with one of the worst oil spills in history can have a negative effect on your stock prices. Transocean stock was riding high through the first half of 2008, but it went into a free fall when markets crashed later that year. The hits kept coming in 2010 with the Deepwater Horizon accident. Unless you pulled your $1,000 out of Transocean stock at any point in the last decade, you’d be left with less than $100 today:

Transocean Ltd.: $83.36

Share Price May 1, 2008: $146.95

Share Price May 1, 2018: $12.25

Compound annual growth rate: -22.00 percent

What’s the takeaway?

No one can predict the future, though financial analysts do their best by looking at trends, culling data, and relying on the established rhythms of the market and economy at large. Those who do not learn from the past may repeat it – and not take advantage of the situation.

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