The financial crisis 10 years after: Lessons to remember

Ten years ago, on 12th October 2007, the main US equity index, S&P 500 reached a relatively high point of 1,561 points.

By March 2009 the index had fallen to just 683 points, effectively losing more than half its value as the global financial crisis was in its most critical phase.

Financial crises can take decades to build but ultimately do occur with regularity Capital markets have rewarded investors who remain invested over the long term

The headlines in 2009 not surprisingly fuelled a sense of panic. At the time, the global financial system teetered on the edge of collapse and only concerted government action (and taxpayer’s money!) averted a full-scale meltdown.

In the minds of some investors there is always a crisis looming that could mean the beginning of the next market “correction”. As we know predicting future events accurately or how markets will react is extremely difficult.

Those who sell or delay making new investments when markets become uncertain are employing a strategy known as market timing. The intention is often to invest once stock markets have calmed down or to buy when markets have gone even lower. This can be a high risk strategy.

Sharp falls in stock markets are often concentrated in short periods of time. Similarly the biggest gains are often clustered together. It is also quite common for a large gain to follow a big fall, or vice versa. Accordingly an investor who tries to anticipate when the best time is to invest runs a very high risk of missing the best gains. This can have a significant impact on the long term return.

James Thompson