The 2008 financial crisis not only battered and bruised the stock markets, but also brought the global economy to its knees. With the COVID-19 pandemic raging on with no end in sight, India and the entire world may be staring at yet another economic crisis. However, the lessons that we learned from the 2007-2008 disaster have put us in a better position to handle another crisis. Here are 5 lessons that we learned the hard way, thanks to the 2008 economic crisis.
Lesson 1: Portfolio diversification is important.
Before the 2008 financial crisis, the portfolios of most investors were concentrated with stocks from only a few sectors. For instance, stocks of banks, lending institutions, and other financial service providers were considered a safe bet by investors. So, many investors put too much of their capital into the shares of such stocks and neglected other sectors.
However, when the economic crisis caused entities in the banking and financial services space to fail, it changed the investors’ outlook forever. They began to diversify their portfolios by purchasing stocks of companies across multiple industries and sectors. This helped reduce their exposure risk.
This lesson still holds true. Choosing mutual funds as an investment option can help you diversify your portfolio. Tata Capital’s Moneyfy app helps new investors and seasoned investors tap into the returns of the best mutual funds in the market. You can easily download this app from the app store and get started with portfolio diversification.
Additional Read: Understanding Mutual Fund Terminologies
Lesson 2: A Systematic Investment Plan (SIP) is your best friend.
Another major lesson that investors learnt due to the onset of the 2008 economic crisis was that systematic investments were much better at keeping their losses to a minimum. A Systematic Investment Plan (SIP) is an investment strategy that allows you to invest small amounts regularly over a period of time, rather than making a lump sum investment.
An SIP utilizes the principle of rupee cost averaging to reduce the negative impact on your investments due to stock market crashes. You can make use of the Moneyfy app to start an SIP and invest in mutual funds. By adopting the SIP approach with the Moneyfy app, you can purchase a higher number of units when the Net Asset Value (NAV) is low (and vice versa). This reduces the average cost per unit in the long run and minimizes your losses.
Additional Reads: Understanding the Power of Systematic Investment Plan
Lesson 3: Patience is key.
The economic crisis of 2008 triggered a massive sell-off in the stock market. This led to scores of investors suffering massive losses. Some even ended up losing almost all of their investment capital. However, when faced with situations like these, it might just be a good idea to stay patient instead of giving into the pressure of selling your investments.
After going through a crisis, the economy and the financial markets are bound to recover at some point in the future. After the crash of 2008, it took around 3-4 years for the stock market to recover and reach the pre-crisis levels. Therefore, it’s a smart idea to hold onto your investments with a long-term view. The likelihood of your investments gaining in value in the future is definitely higher.
Lesson 4: Look past the equity market.
When it comes to investment options, most people turn to the equity stock market. While equities do offer a good return on your investment, there are other avenues that many investors fail to explore. The economic crisis of 2008 strongly nudged investors to look for opportunities beyond the equity market.
In fact, during the crisis, assets such as bonds, debt instruments, and other government securities turned out to be star performers. Hence, an investment portfolio that incorporates multiple asset classes is more likely to survive a financial crisis. With Moneyfy from Tata Capital, you can invest in debt mutual funds or hybrid mutual funds easily. There are also options like gold funds that can help you diversify your portfolio.
Lesson 5: Be prepared.
With the way the economies of the world operate, an economic crisis is inevitable. The likelihood of such a crisis repeating itself is extremely high. During 2007-2008, many small-time investors made a costly mistake by living in a bubble and by not having an adequate emergency fund to fall back on.
With the employment rate in India being impacted severely, it’s all the more essential now to be prepared for such financial contingencies. Emergency funds help you tide through difficult times like this even during an economic slump.
It is also crucial to educate yourself and look out for signs of economic slowdowns and stresses. This can help you get ahead of the curve and can protect your investments by drastically cutting down your losses.
So, with the lessons learned from earlier crises, we can power through this current situation and emerge stronger at the other end. All it takes is a degree of caution. To ensure that your investments remain largely unaffected by this crisis, it’s best to take the learnings from the 2008 crisis and apply the lessons to the current scenario. By doing that, you can protect your investments today and reap the rewards tomorrow.