Investing Strategy Archives

Financial Crisis 10 Years after: Lessons to Remember

Early October 2007 marks the 10-year anniversary of the S&P 500 reaching a high point. It then lost more than half its value during the global financial crisis. In the coming weeks, the financial news media is likely to examine how today’s environment compares to the period leading up to the 2008 crisis. It is difficult to draw useful conclusions based on observations and opinions: market forecasters focusing on the short-term will “fill your ear but will never consistently and systematically fill your wallet.”

Financial markets have a habit of behaving unpredictably in the short run. There are, however, important lessons to take away:

The emotions of market timing

Today, stock prices are fairly high while growth is widely expected to be slow. Should equity owners sell? I did, prior to the crash of 2008, and I now regret my decision every time the market hits a new high. I’m also afraid to get back in. It’s difficult to time the market, even if behavioral finance teaches us that the price is not always right.– Laurence B. Siegel, The Inventor of Behavioral Finance Looks Back (A book review of Richard Thaler’s Misbehaving: The Making of Behavioural Economics).

Genius at Work

Warren Buffett’s annual Berkshire Hathaway shareholder letter provides insight into investment strategy worthy of consideration by all investors. This year’s letter, celebrating the 50th anniversary of Berkshire Hathaway under Mr. Buffett’s management, is no different. The following six insights may prove especially valuable to the individual/independent investor.

1. Stocks offer better long-term inflation protection than interest-bearing securities.

Chasing Performance : Don’t Trip on International Stock Funds

Over the past five years, US stocks have trounced foreign stock performance. In case you are now considering a reduction in your foreign stock holdings, let’s take a moment to examine performance-chasing and the benefits of global diversification.

Sensible investors pursue diversification as a policy to reduce risk, not as a tactic to chase performance. By following a disciplined policy of maintaining a well-diversified set of portfolio exposures, regardless of market zigs and zags, investors establish conditions for long-run success. In fact, when taking market conditions into account, investors increase the odds of success by diversifying into asset classes after they suffer poor performance. In any case, foreign equities provide an important tool for reducing portfolio risk without sacrificing expected returns. – David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

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