More Lessons From The 2008 Financial Markets

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

Larry Swedroe, principal of an asset management company and investment book author, also posted his Lessons That 2008 Taught Us In 2008 on SeekingAlpha. It was a nice compilation that covered a variety of topics from active management to Madoff to your “Plan B”.

Here are some excerpts of a few lessons involving investing and your portfolio:

Don’t forget that companies that managed money themselves were often the victims this year!

Lesson 1: Neither investment banks nor other active managers (including hedge funds) can protect investors from bear markets. […]

If their money managers could protect you, why did firms like Lehman Brothers and Bear Stearns go belly up and Merrill Lynch have to be rescued by Bank of America? It is in the best interest of these firms to manage their risks well. Yet, they have clearly demonstrated that they cannot. As evidence of their lack of ability to forecast events consider that in 2008 Lehman spent $751 million buying back its own stock at an average price of $49.60 and Merrill Lynch spent $5.27 billion buying back its stock in 2007 at an average price of $84.88.(2)

Lots of other historically renowned and recommended active managers had a bad year as well.

Lesson 6: One of the more persistent myths is that active managers can protect you from bear markets. In 2008, the hardest hit sector was financial stocks. Financials comprise a significant portion of the asset class of value stocks. As benchmarks for the active managers we can use the Vanguard Small Value Index Fund that lost 32.1 percent and the Vanguard (Large) Value Fund that lost 36.0 percent.

The following is a list of the returns of some of the actively managed mutual funds with superstar value managers, four of whom were named by Morningstar in June 2008 as their recommendations to run value superstars, their recommendations (those are noted with *): Legg Mason Value Trust lost 55.1 percent; *Dodge & Cox lost 44.3 percent; Dreman Concentrated Value lost 49.5 percent; *Weitz Value lost 40.7 percent; *Schneider Value lost 55.0 percent; and *Columbia Value and Restructuring lost 47.6 percent.

Of course, some actively managed value funds beat those benchmarks. However, how would you have known ahead of time which ones they would be?

Some did guess this would happen. But was it luck or skill?

Lesson 9: There is a great likelihood that each time there is a crisis, some guru will have forecasted it with amazing accuracy. But that ignores two important facts. The first problem is that even blind squirrels occasionally will find acorns. In other words, there are tens of thousands of gurus making forecasts all the time.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

User Generated Content Disclosure: Comments and/or responses are not provided or commissioned by any advertiser. Comments and/or responses have not been reviewed, approved or otherwise endorsed by any advertiser. It is not any advertiser's responsibility to ensure all posts and/or questions are answered.


  1. Financial Fellow says

    I think it would be interesting to hear a good debate on active vs. passive investing (index vs. mutual funds). I tend to subscribe to the belief that over the long haul the active money managers will not generate returns great enough to overcome the additional fees they charge (when compared to the returns of index funds.)

  2. It has always amazed me that active managers havent regularly beat the market especially in downturns. They shoot themselves in the foot when their prospectus’ require them to be x% fully in the market….

    I do remember when one Fidelity Magellan manager in the 90s overly allocated in treasuries when he thought the mkt was about to head south but it didnt. He got beaned for underperforming…..

    I started investing in the 90s thinking active HAD to beat indexing. I switched to indexing in 2k and thought index diversification HAD to keep my boat floating…. I am switching to taking profits off the table as they come, and more in cash vehicles knowing just saving money HAS to beat bear markets :-).

  3. I like Larry Swedroe. I’ve bought and read his three (horribly titled – makes it sound like financial porn) “Only Guide To a Winning Strategy You’ll Ever Need” books and highly recommend them. He finds the time to help posters on the forum all the time.

  4. I feel that in some asset classes having a manager can add value, such as the micro cap, possibly the small cap arena. For the most part I feel that a proper asset allocated portfolio in index funds makes the most sense. Key word, proper asset allocated folio. After reading much research and investigating some of the smartest investors they all tend to index. Some vehicles are out of reach for the average investor but I have modeled my portfolio after some of the Ivy league schools endowment funds. I wish I had access to actual timberlands but do not have a high enough net worth to add that asset class properly to my folio. That is one thing I am grateful for is there are products now that the average investor did not have access to 5-10 yrs ago that we do today. The key is picking the right index that fits your needs. Back to the active/passive argument, you may get lucky and find a shinning star but it is very hard to find & then you have to keep up with if the shinning star leaves the fund or were they a shining star for the fact they had a lucky hand one time around. I’d rather not have to worry about my portfolio in those terms, there’s enough to keep track of. Good luck

Speak Your Mind