It's been a year since the fall of Lehman Brothers, the storied investment bank that was forced to declare bankruptcy following an unsuccessful bid for a government bailout. Its failure caused a massive selloff on Wall Street that eventually pushed the S&P 500 index to the 666 level in early March 2009. Stocks have since rallied about 60%.
Though these types of market events are rare, they do occur, and it's both surprising and awe-inspiring to witness global wealth destruction on such a grand scale. What can savvy advisors and investors learn from such scenarios?
First, market swoons and the explosive rallies that often follow are excellent examples of how difficult it is to buy bottoms and sell tops. Adding to a losing portfolio seems insane when everyone around you is panicking. Hedge fund managers were slow to re-enter the markets until just a few months ago. What looks easy on a price chart is often much more difficult in the real world.
The importance of diversification was certainly well illustrated last year. As all risky assets crumbled in price, 30-year Treasuries (TLT) gained over 30%. Having all of one's eggs in one basket can be devastating when that basket eventually succumbs to the laws of financial gravity.
