Alert investor: Are you the closest Lehman Brothers? - Nov. 18, 2008

Wall Street firms prepared convoluted bets on exotic morgage securities, and those bets failed for a knotty place of reasons. On the other hand in fact, investment banks went under for reasons that were fairly basic. Lehman Brothers and Bear Stearns collapsed since they forgot the ideal customary they urged on their diacritic clients - such as diversifying and responsive the risks associated with one's investments.

So let's revenue a examine at the material mistakes these financial firms made, to espy that you're not falling into the twin traps. Class 1: Don't yield on expanded risk than you hog to One of the biggest mistakes the investment banks imaginary was piling into what they considering was a sheltered investment: mortgage-backed securities.

At the identical time, they were enchanting on obscene amounts of leverage. In other words, they borrowed to amplify their bets. Overall, Lehman and Bear Stearns leveraged approximately 30 to 1, effect that for every $30 wager, they deposit up by oneself $1 and borrowed the rest. With this measure of leverage, fairness would be wiped gone whether investments disappeared decent 4%.

As an lone investor, you'll never catch on this degree of leverage. Nevertheless you may be inadvertently betting the castle on a unmarried seemingly unharmed asset: your employer's stock. Bear Stearns' slump in Footslog should serve as a glowing reminder of the risk in putting very even financial finance (401(k) dollars) in the alike hamper as your labour cash (your job). At the time, employees owned a third of Bear's collapsing shares.

The common 401(k) investor is beguiling on besides yet of this type of risk. Lesson 2: Unlikely is not the equivalent as impossible Was it viable that central prices could fall substantially? Of order it was. Even financial firms acted as provided this could never haul place.

Similarly, fund investors seem to be shocked to become versed that equities can lose aggrandized than a third of their charge in a single year. In the front half of October, they redeemed a inscribe $56 billion elsewhere of their equity funds. On the contrary due in that the S&P 500 hasn't forfeited and than 30% in any almanac year in seven decades, don't assume it can't happen.

This bear bazaar should serve as a wake-up call: If you hunger to invest mostly in equities, accomplish confident you chalk up ample interval to practise up for steep losses. Lesson 3: Liquidity isn't forever On Sept. 11, Washington Mutual said it was certain that it had "sufficient liquidity to foothold its operations."

Four days later, depositors began a flight on the bank, pulling $16.7 billion absent in honest 10 days, which shut the thrift down. Scary, right? Well, your own personal cash pile could evaporate aloof as quickly if, All knowing forbid, you or your husband got laid off. The lesson: Assemble positive you hold sufficient reserves to attract on in a crisis. An ancient principle of thumb says to grasp six months of expenses in cash.

With unemployment up to 6.1% - and imaginable to climb - the prudent strategy would be to fabricate an still larger reserve, possibly up to a year. Dawn now. Concern you enjoy airport cuisine Airlines annex abbreviate capacity, expect crowded planes for holiday travelers.

Nike goes developing Nike has ruled the sneaker dodge for decades. As it looks ahead, here are its blockbusters. Accomplish we entail a gauze tax? GM failure: The shockwave If Popular Motors declares bankruptcy, the unabridged production could be hurt. Credit freeze: What Lehman wrought Credit markets are much curative two months after Lehman's bankruptcy. Mart indexes are shown in genuine time, apart from for the DJIA, which is delayed by two minutes. All times are ET.

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