Question

In your own words, give a description of how the financial crisis occurred and the take away that will impact your personal personal investment strategy.

Answer 1

The financial crises was primarily caused by deregulation in the financial industry that permitted banks to engage in hedge fund trading with derivatives. Banks then demanded more mortgage to support the profitable sale of those derivates. They created interest only loans that became available and affordable to subprime borrowers. The federal reserve raised the Fed fund rate just as the interest rate on these new mortgages reset. Housing prices started falling as supply outpaced the demand. This thus trapped the house owners who could not afford to make the house payment and could not sell off their houses as well. When the value of the derivatives crumbled, banks stopped lending to each other. This created the financial crises that lead to the Great Recession.

The most important and key take away for personal investment strategy after the financial crises would be:

1. To clearly understand what the investment type is and the benefits are. If some thing does not seem right, not investing there would be the most appropriate decision.

2. Be aware and stat alert- A good financial plan not only means investing in the right avenues and monitoring the plans progress, but also ensuring that one does not loose it's hard earned money.

3. Ensure that the investments are not done only in one area but are diversified in many avenues so that even if one fails or goes bad the others are still good enough and provide better returns.

4. Read about the investments and be aware of the situations and if any investments seem to be too risky or giving too much returns this needs to be thoroughly reviewed.