Five ways in which you can turn any financial crisis into wealth creating opportunity

Sunil Sharma

Looking back at the Lehman Crisis or 2008 financial crisis, there are a number of learnings that come forward.

Crisis and Boom Cycles Occur With Regular Frequency:

The days of the Lehman crisis were amongst the most painful ones experienced by investors in the past decade. Many investors were unable to take the pain of losses in their portfolios and exited their holdings as the sell-off intensified.

The worst mistake were made by investors who sold into the bad news, only to watch markets roar back in 2009. So, one key lesson that investors need to take is a methodology that enables them to sidestep the meaningful pain that is encountered during sell-offs.

There are a few approaches, and one will make sense to an investor based on their investment and risk preferences.

Excessive Bearishness and Conservatism is Harmful to Investment Returns:

In the aftermath of the sell-off, investors swore off equities and moved en masse to fixed deposits. Further, investors remained excessively bearish on equities until mid-2014, before finally stampeding into equities over the past three years.

In both instances, excessive conservatism and pessimism proved harmful to long-term portfolio returns. More than understanding investments, investors need to understand the psychological aspects of investing.

Over the course of the previous decade, many bearish prognosticators have come forward and issued dire warnings about vicious sell-offs.

In each instance, markets have traded higher in the short order, and that is the nature of markets, to act with an upward bias.

Buy and Hold Works, Selectively:

Time and again, buy and hold in India has proven to be an extremely profitable decision. But what about Japan, where the Nikkei peaked above 38,000 around 1990, dropped to 7,173 in 2009, and sits at 22,600 today. Buy and Hold makes sense if you’re buying quality at a reasonable price.

Be Wary of Leverage:

Time and again, leverage kills returns. 2008 and Lehman Brothers were about excessive leverage and euphoria. That’s a toxic combination for investment portfolios.

Be Wary of Excessively Pessimistic Narratives:

Every once in a while the consensus will get it right like they did with Modi in 2014. However, the consensus will generally be wrong.

The consensus has been too bearish since 2009, and the world has been sold an excessively pessimistic narrative over the past decade. Many investors bought into this narrative, and have paid the price of excessive pessimism and generated lower returns.

In conclusion, investors need to be watchful of the macro environment and be aware of the psychological pitfalls that can impact portfolio returns.

If an investor can protect portfolios in advance of a major crisis, that can accelerate the investment portfolio return. If that sounds difficult, buy and hold, and buying regularly is the other means of achieving worthwhile returns.

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