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7 investing lessons I learned from the GFC

One of my first jobs out of university was working at the European Bank, where the Christmas of 2007 in London’s financial district generally revolved around parties and egregious consumption as markets boomed.

By the time the GFC hit in the second half of 2008 I was working as an analyst at a top tier international equities manager when things turned from boom to bust in the blink of an eye.

Still, the GFC taught some important lessons about markets and the psychology of investing for all investors.

You cannot control markets – sounds obvious, but a lot of people forget this in a bear market and either sell or act on a wealth manager’s advice to sell in the belief they have no choice but to sell or take further losses.

This mistaken attempt to control a market is euphemistically known as ‘acting defensively’, whereas in reality it is capitulating to scary headlines and often bad advice!

Don’t let your investments’ behaviour control your own behviour, instead control your investments through behaviour that emphasises a long term approach to investing returns. In other words think where you want your investments to be in three years, not three hours, or three days from now.

Don’t invest what you can’t afford to lose – margin lending or investing funds that you’ll need for short-term cash flow obligations is not a sensible approach, as watching funds you need disappear in value is likely to encourage (or force) you to sell.

Equity markets often go down across the board and if you’re not ready or able to accept this reality, don’t invest in them.

Don’t bet against markets falling further – This was another common mistake made by amateur and professional investors during the GFC.

Just as averaging down into falling stocks is a bad idea, so is taking a contrary bet against markets falling further in the middle of a major economic crisis.

In London there were plenty of professional fund managers selling options on indices to protect buyers on the other side of the trade from further downside risk. The stories of these professional fundies betting against the market falling further during the GFC were unsurprisingly not well publicised by their employers, but plenty of market participants incurred even larger losses than others in the belief the market was ‘oversold’ or due a rebound.

Buying shares at discounted prices in the event of a downturn is a sensible strategy, but don’t throw the kitchen sink at stocks or bet on a rebound at the first signs of market tremors.

Spread your risk – This sounds obvious, but nobody expected Lehman Brothers to collapse at the start of 2008. Any business across any sector can run into serious trouble as a result of problems of its own making, or if it is the victim of an unpredictable “force majeure” such as a terrorist attack, natural disaster or GFC for example.

If you have half your portfolio in a single ‘high-conviction pick’ you’re inviting trouble, and putting more than 15% of an equities investment portfolio in any single stock is generally not advisable.

Counter-party risk has grown exponentially – Prior to the GFC this was considered immaterial compared to credit and market risk.

Not anymore though, as the GFC and the liquidity crisis it spawned showed investors how indivisible capital-market facing companies are from one another. This speaks to the reality that it’s reckless to believe any publicly listed company is immune from external shocks, or cannot collapse in quick time.

Avoid buy low, sell high advice – easier said than done, but it pays to consider that much of the professional financial advice industry takes the direction of markets as its cue to give advice and ‘sound professional’.

For example in Australia when commodity prices are rising retail investors are generally advised to ‘buy’ into the rising share prices of the likes of BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO).

According to Reuters 16 out of 17 professional analysts currently have a hold, outperform, or buy rating on BHP shares, with the stock up 20% over the past year.

The problem is that you might find those ratings turn negative as commodity prices and stocks fall in value as analysts assume profits will fall. This ‘buy high, sell low’ advice is the last thing you need given the additional risks around general market crashes.

Everything passes – well hopefully anyway. Generally stock market charts have gone up and to the right for the past 100 years, with even catastrophic events such as the GFC actually turning into not much more than blips over the long term.

In fact if you’re really smart you’ll recognise a big bear market as more of an opportunity than a threat.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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