I started blogging about dividend growth stocks in January 2008; right around the time the market started its slide. Fast forward 18 months and we have seen it all: from companies which were once deemed too big to fail and which were later acquired for pennies on the dollar to the blowups of several prominent pyramid schemes and hedge funds. Back in early 2008 most investors were not fully aware of the dangers that the real estate implosion would have on the overall economy. Some aggressive investors lost much more than S&P 500 in 2008 due to their heavy concentration in certain sectors built at the highs of the market, use of excessive leverage and chasing “broken companies” which offered suspiciously high yields, which proved unsustainable.
In order for investors to become better at allocating capital, it is important to learn from ones mistakes. I have identified several mistakes, which could have saved investors billions had they known about them in the first place:

1) Diversify your portfolio. We often hear that diversification is dead and the fact that in a crisis almost all assets go down in sync. While this is somewhat true, a simple diversification strategy where an investor held some allocation to government fixed income, would have resulted in smaller losses. There are several bond ETF’s which hold US Treasuries. Examples include iShares Barclays 20+ Year Treas Bond (TLT) and iShares Barclays 7-10 Year Treasury (IEF). It is also important to understand that simply adding different asset classes in a portfolio may not provide any diversification benefits. For example adding fixed income from High-Yield Bonds would not have provided any diversification benefits, as most junk bonds represent companies with low credit ratings, which have a higher chance of defaulting during a crisis. Several Junk Bond ETF’s such as iShares iBoxx $ High Yield Corporate Bd (HYG) were introduced right before the financial crisis.
In addition to that, investors who concentrated their portfolios in just a handful of companies (10 – 15) would have under performed their benchmarks even if they had just one AIG (AIG) or Bank of America (BAC) in it. Both companies were considered the best of the best, before the crisis affected them and they had to seek government funds, while reducing or eliminating distributions to shareholders.

2) Build positions over time.