Lehman Brothers’ Collapse a Decade Ago Offers a Key Lesson for Investors Today

"The rocky ride the market has experienced over the past decade shows that, despite plenty of dips along the way, the general trajectory for stocks is upward."

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Before the longest running bull market in U.S. history got started, one of the country’s longest-running banks collapsed. Lehman Brothers’ bankruptcy, declared on September 15, 2008, was the largest ever and marked a major plot point in the financial crisis and the Great Recession. Ten years later, Americans continue to harbor a distrust of Wall Street and big banks. But one lesson investors can also take away from Lehman’s downfall, and the drop and recovery in the market that followed, is that you ought to trust the stock market.

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Hold on. Remind me what the deal was with Lehman Brothers.

Once upon a time, Lehman Brothers was the fourth largest investment bank in the U.S. (after Goldman Sachs, Morgan Stanley and Merrill Lynch). It made some heavy investments in mortgage-backed securities and went down with the housing crisis, ultimately filing for Chapter 11. With more than $600 billion in assets at the time, Lehman remains the biggest bankruptcy story in U.S. history, disproving the bank catchphrase of that era—it was not, in fact, too big to fail.

What happened with stocks then?

Sink, sank, sunk. That day, Standard & Poor’s 500-stock index opened at 1250.92 and closed at 1192.69, or 4.7 percent down for the day. Over the following six months, it continued to slide to a low of about 666 in March 2009. And that was following a loss of more than 20 percent since its October 2007 peak already. 

Then what happened?

The longest running bull market in history. Since its March 2009 bottom, the index has more than tripled, as of mid September, hitting new record highs on a semi-regular basis. 

So the lesson is…?

Stick with stocks and your long-term investing strategy. The rocky ride the market has experienced over the past decade shows that, despite plenty of dips along the way, the general trajectory for stocks is upward. You just have to be patient and focused on the future in order to capitalize on it.

For example, if you’d invested in an S&P 500 fund the day before Lehman’s fall, you’d have lost 40 percent over the next six months. On the other hand, if you had cut and run the next day, you could have limited your loss to less than 5 percent. (And you wouldn’t have been alone—in the selloff on September 15, 2008, trading volume about doubled the prior year’s daily average.) The problem with that scenario: When would you have gotten back in? More likely than not, whenever it was, you would’ve missed out on some gains.

But if you’d gone against the crowd and simply stayed the course, you’d have broken about even within three years. Now, ten years later, you’d have gained an average 11 percent a year, according to CNBC. (In total, S&P 500 index funds have increased in value by nearly 130 percent since then.) Bonus: You would never have had to sweat over when to jump back in.

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