Lessons from the 2008 Markets Selloff: Searching for Alpha, October 2009

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.