Lessons from Lehman Brothers

This week marks the tenth anniversary of the collapse of Lehman brothers, which precipitated the worst of the Global Financial Crisis (“GFC”).

CNBC reporter Michael Santoli recently wrote an interesting post examining what would have happened if you invested in US shares the on the Friday before Lehman Brothers declared bankruptcy. It turns out that you would have made a 130% return on their money if they had held your shares for ten years.

I decided to perform a similar exercise with Australian shares. The results are interesting. Investing at the worst possible time doesn’t have to be a disaster if you’re patient. But that’s not always easy or even possible for everyone. It requires making some difficult trade-offs.

Ultimately, managing these trade offs is a very individual thing. It requires a set of reasonable expectations for market risk and returns. And it also requires self-awareness and a clear understanding of your circumstances and goals.

I’ll briefly cover some lessons that can help investors develop their own expectations. My next post will consider the importance of self-awareness and how to develop it. Finally, I’ll offer a simple framework for evaluating circumstances and goals in my third and final post.

OK, what if you had invested $10,000 in Australian shares on the 31st of August 2008, or fifteen days before Lehman Brothers declared bankruptcy?

By the 31st July 2018, it would have grown to $18,985.30 with dividends reinvested and $12,229.83 without dividends reinvested[1]. That’s a compound annual growth rate of 6.68% with dividends reinvested (2.05% without dividend reinvestment).

Yes, its lower than the long term historical return for investing in shares. But its not bad for a period that begins with the worst financial and economic crisis since the Great Depression. 

The chart below shows the cumulative performance of the ASX 200 Accumulation (orange line) and ASX 200 (blue line) indices. The difference between the two lines is the reinvestment of dividends. The accumulation index assumes that dividends are reinvested. The ASX 200 does not. It measures only the change in price of the shares that make up the index.


Of course, the first thing that you noticed was the big dip in value during 2008 and early 2009. This is the GFC.

The next chart shows the effect of the crisis in all its gory detail. This chart is known as a drawdown chart. It shows two things. Firstly, how far away an investment is from its all-time high at any point in time. Secondly, how long it takes for an investment to recover its losses.


Once again, the ASX 200 Accumulation index is shown in orange and the ASX 200 Index is shown in blue.

The first thing that you’ll notice is that drawdowns were smaller for the ASX 200 Accumulation index. This is because the income earned from dividends partially offset some of the capital losses.

For example, if the stock market falls in value by 20% over a 12-month period and the dividend yield of the market is 5%, then the loss of accumulation index is 20% – 5% = -15%[2].

Dividends aren’t much of a cushion during a crisis. The GFC drawdown of the ASX 200 Accumulation Index was -33.1%, only slightly better than the -34.9% drawdown of the ASX 200 Index.

What does this mean in dollars? Your $10,000 investment would have fallen in value to $6,689.87[3] in 5 months! It took until the beginning of January 2010 (seventeen months) to break-even.

And if this wasn’t bad enough, you would have also suffered a drawdown of more than 10% in 2010 and a drawdown of almost 15% in 2011.

The questions that we all need to ask ourselves are:

  • What would I have done during this period?
  • Would I have stuck with my investment?
  • Would I have sold out at the low?
  • If I sold out, would I have had the courage to get back in?
  • If so, how would I know when to get back in?

Ideally, the time to answer these questions is before you’re faced with a bear market. Trying to figure this out during a crisis and when emotions are running high is asking for trouble. This is why its important to form a set of realistic  risk and return expectations. I’ve written this post to give readers a small taste for the kind of information that can help them to do this.

It’s worth spending the time to get educated on the basics of what to expect from your investments. Otherwise, you’re investing blind. And its essential to have a written investment strategy and a plan for how to deal with the unexpected. It has to be written down because we all retrospectively alter our memories when we’re in a highly emotional state (i.e. experiencing a large financial loss).

The second thing that you probably noticed is that you would have spent almost all of the last ten years in drawdown (i.e. your portfolio is trading below its most recent all-time high).

The lesson here is that you should look at your portfolio and expect to see that it’s lower than its most recent high. New all-time highs are the exception, not the rule. Remember, stocks still appreciated by approximately 89% over ten years, or 6.68% per year, despite spending most of the time in drawdown.

One way to reduce anxiety over drawdowns is to check your portfolio infrequently. The more often you check your portfolio, the more volatile it will seem and the more anxious you’ll become.

It’s important to remember that stocks become less risky the longer that you hold them. For example, the table below shows the likelihood that you would have seen a positive return on your investment in Australian shares over the last ten years[4].

Time Period

% Positive ASX 200 Accumulation

1 month


3 months

12 months


3 years


5 years


You would have seen a positive return 60.5% of the time in any given month over the last ten years. In other words, months with losses are very common!

Notice what happens when you lengthen the time period. If you’d checked your portfolio every twelve months, you would have seen a positive return over 80% of the time. Even better if you only checked it once every three or five years.

Remember, these statistics are calculated assuming that you invested in Australian shares two weeks before the collapse of Lehman Brothers. That is, just before the very worst of the GFC.

The last chart shows the distribution of monthly returns over the last ten years. As you can see, there were some shockingly bad months. The worst was -12.61% in October 2008.


The return distribution in the chart is negatively skewed. This means that gains occur more frequently than losses (which is good) but that losses, when they do happen, can be more severe (which is bad).

This is a feature of stock market returns. In fact, if it wasn’t for the ever-present risk of loss, the returns for owning shares would be a lot lower. The reason that shares out-perform other investments such as cash is because investors expect to be compensated for the extra risk. No pain, no gain.

Investors have a choice. They can either avoid the risk over the short-to-medium term, in which case they also miss out on higher returns. Or they can suffer negative returns to earn a much higher return over the long-term.

Most people find it difficult to decide. This is why the investment industry is full of “have your cake and eat it too” products. These products seemingly offer a way out of having to make this tough choice. Most people find the trade-off between short-term risk and long-term gain so unpalatable that they are willing to pay high fees for complex products offering a potential way out. The sad irony is that even if the investment strategy underlying these products works, it rarely benefits the investor on a net-of-fee basis.

How can you tell if you can take the risk of investing in equities? It comes down to two things:

  • Psychology
  • Capacity

We’ll consider these topics in my next two posts.



[1] This estimate ignores taxes and transaction costs.

[2] This is just a simple approximation, but you get the idea.

[3] ASX 200 Accumulation Index. All of the other figures quoted in this post relate to the Accumulation index.

[4] The table shows overlapping periods


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