The lesson was much more brutal for people in their 60's and 70's. I have been astonished at the number of retired people I meet who have lost 40-60% of their nest egg. Most had over 80% of their stash in stocks, some even had most of their money in a single stock. Many didn't even know they had that much money riding in the stock market because they trusted their FA to come up with an age-appropriate asset allocation. Even people who were diversified have lost considerable amounts of money. My MIL, 65, is freaking out right now. Her small nest egg has taken a beating and she needs the money to help pay the bills.
If the young people take any lesson away from this economic downturn, it should be to "not get complacent". I am 62 and I learned this lesson in 1978 with 15-20% inflation, high unemployment, and zero economic growth was called stagflation.
In good times people are always saying, "We finally have full control of the economy and never will experience a downturn again." That's a sure sign that people are becoming too complacent. In most cases, you can see the writing on the wall of a coming recession. The BIG clue this time was the doubling of house prices in a 5 year period. Nothing doubles in value in 5 years - especially big ticket items. Something must be wrong. Also, our national debt was steadily accelerating and the import/export balance of trade was growing at a rapid rate as well.
All of these very disturbing economic trends were well reported in the news, yet the stock market continued to climb. If the one rule of thumb for successful investing is "invest for the long run", then a second rule of thumb is to change your portfolio (and take your profit) when thing look "too good to be true". This may should like conflicting advise, but it is not. The "long run" should be a length of time about 5-7 years. If your investment strategy has produced a nice profit after this length of time, then it is time to restructure. Put more money in safer places and review your portfolio to make sure you are not in a dying or threatened market.
Second, look for black clouds on the horizon. One example is health care stocks. They have been climbing steadily for a long time, highly recommended as being "recession proof", and now Obama has a mandate to lower health care costs. You don't have to be a stock wizard to see that investing in health care is risky. If I am totally wrong then I will have missed out on an opportunity. IMO it is better to error on the side of caution.
You can use the same common sense logic to see where the sun is likely to continue to shine. Recognizing that a falling stock market leaves few survivors, every stock is at risk simply because of investor sentiment. This tells me that some very promising businesses must be extremely undervalued. Looking at the world around us, it seems obvious that technology still has a strong future. Handphones are constantly evolving - but I see many areas of life that technology has not yet touched. All levels of education could become more interactive through some yet undeveloped device that ever student needs. Interactive shopping and aids for running a household still is still stuck on the internet. I can see the need for devices to monitor food supply and other household supplies becoming more interactive and user friendly. The same devices could aid business office supplies.
Since most technology stocks are traded on the Nasdaq, it seem logical that this still has a lot of potential for growth. A broad based technology fund, such as Vanguard or technology exchange-traded fund (or
ETF) clearly has a bright future.
My point in all this discussion is not to give stock advice. Rather, be aware of what major trends are changing in the world around you. Of course you will want to listen to the convention wisdom for constructing your investment portfolio and strategy. However, when the time comes for you to make the hard decision on selecting an area of investment, look at the macro world around you for some obvious clues on what the future holds. And don't disregard the obvious dark clouds and rays of sunshine.