No matter how the stock market reacts, there is a lesson to be learned and when the market dips and investors lose money, the lesson learned can perhaps be more important. Those who are real smart investors will learn from the mistakes committed and take note of them, and then move on. Having learned their lessons the hard way, they will not make the same mistakes again in the future and thus, they are bound to yield a better return.

The current collapse in the stock market over the last 2 years or so is thus an opportunity for the investors to find out where they went wrong. And it has been one of the hardest collapses because the price of some stocks has come down by as much as 100%. But in all honesty, it has to be conceded that the collapse was not exactly one that happened in the stock market. Rather, the economy itself went into a severe depression and since the stock market is deeply linked with the economic condition, the recession had the effect of bringing down the market too. And now that it seems that the economy is about the climb out of the recession, the stock market is looking happier too. It has thus become very important to analyze the mistakes committed and learn lessons from them to ensure that history does not repeat itself.

Lessons Learned

# 1 – Many investors made the mistake of assuming that the boom would continue for a long time. Because of this, they were not afraid of buying stocks even at very steep prices even though the price had escalated rapidly and that too without any apparent reason. This has often been the case. The prices of too many stocks had climbed too sharply and there was no solid financial reason to back them up. Now we believe that the escalation was fueled mostly by more money seeking fewer stocks and nothing else. This should never have been the case.

# 2 – Far too many investors made the mistake of going with the flow. The fact is, billions of dollars in investor funds could have been saved if the investors had studied the market closely and opted for the right asset allocation mix. There is a popular saying – “Never put all your eggs in one basket”, and investors need to remember this. The right mix of bonds and stocks is needed. And even there, the investors need to spread the money across industries and not just pick one or two.

# 3 – Perhaps the time has come for the regulators to do more, so that the investors can take informed and educated decisions. Wild guesses fueled by rumors that are often baseless is bound to be costly today or tomorrow. After all, no one can ride his/her luck forever.

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