September 10, 2018

What if You Invested on Lehman Eve?

It has been a decade since the Monday September 15, 2008 collapse of storied investment bank Lehman Brothers.

Until that moment, it was 'common knowledge' that the Fed would bail out any large failing financial institution. However, with Lehman Brothers the Fed called investors' bluff and did not intervene. This 180 in policy marked a stark new reality for investors.

The Lehman collapse sent financial markets into a panic as investors hastily re-evaluated their counterparty risk.

Leading up to the Lehman collapse stock markets were already on the decline, having peaked months earlier. On Friday September 12th, 2008 (Lehman Eve), not knowing what was to come, many thought the market was cheap and put money to work. Of course, after the Lehman collapse the S&P 500 subsequently fell another 45%, bottoming months later in March 2009.

Pepto Bismol was in high demand for those who held on for the ride. Despite their incredibly unfortunate timing, investors with the intestinal fortitude to pucker-up for the long-run were ultimately rewarded. As you can see in the chart below, they recovered within a couple years and are today up 186%.

My message to you: we are probably in the late stage of the bull market that began in 2009 and you might be wary of putting money to work. What the Lehman experience illustrates, however, is that even the worst-timed investment might become profitable with a long-enough time horizon. 

Personally, I've learned over the years that the best thing I can do for my own investments is to do as little as possible. Yeah, I might be easing my risk exposure right now but only because I know good things don't last forever. Still, I've been wrong before and I'll be wrong again. But the point of the chart below is to show that even when you're very, very wrong you might (assuming we don't become Japan 2.0) become 'right' if your time horizon is long enough and you've got eggs in a few different baskets.


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