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Financial crisis: Lessons learned by investors

Ilana Polyak, Special to CNBC.com
Monday, 16 Sep 2013 | 9:23 AM ET
Glow Images | Getty Images

By his own admission, Travis Chambers is a jittery investor.

Early in his career, he sustained big losses in the stock his former employer had given him. Like many investors, Chambers couldn't stomach the financial crisis, watching the downturn in stock markets globally five years ago.

After consulting with his wife, Kia, the Columbus, Ga.-based real estate agent sold all his stocks, including those in retirement accounts, and plowed the money into an asset class he knew better: real estate.

Though the housing market was also battered, Chambers, 42, gambled that the presence of the Fort Benning military base made his local market less vulnerable.

The couple bought three single-family homes in foreclosure in late 2008, rehabilitated them and sold them within the year.

Their initial $100,000 investment turned into $180,000. That profit was eventually tucked away in a money market fund.

"We made a great investment," he said. "I have no regrets."

Are they going back to investing in stocks? Don't bet on it. Travis and Kia, 41, prefer to invest in real estate.

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While other investors may not have taken such a radical turn, the experience of the 2007-2008 market meltdown was so jarring that many are just now starting to come back to stocks.

To that point, the tide began to turn at the beginning of this year, with investors depositing more money in stock funds than in bonds, according to the Investment Company Institute, a mutual fund trade group.

Behavioral economists, like Meir Statman, professor of finance at Santa Clara University, say the overreaction by investors makes sense.

(Read more: Year-end financial planning)

"We have a tendency to extrapolate not only the most recent experience, but the most vivid," he said. "Even though the market has gone up substantially, when people think about it, they don't think that it's gone up."

Marianna Baum, a clerk at a Barnes & Noble living in Syracuse, N.Y., had only been investing in the stock market for four years before the worst financial crisis since the Great Depression hit.

Around that time her parents sold their Mount Laurel, N.J., farm for a $2.4 million, a sum no one in her family had ever seen before.

The family needed a safe place to invest the money, so Baum helped her parents find a financial advisor in Syracuse. It was her parents' first experience with investing in the markets.

And for four years it proved to be a solid experience. The account grew enough for Baum to comfortably pay for her parents' assisted living facility.

"I would say to my Dad, 'Look, this account makes more money in one month than you ever made in your life,'" she said.

But the financial crisis hit and Baum's investments, like countless others, went into a downward spiral. By March 2009, Baum said she had enough. She called her financial advisors and told them to sell everything.

"They convinced me that by staying the course, I would be better positioned to take advantage of any turnaround," she said.

Though painful, she waited it out.

"I don't think I opened my statements for six months after that," she said.

(Read more: Financial advice for middle class)

Despite her jitters, Baum never took money out, and she admits she's happy she listened to her financial advisors.

The experience still jars her, however. Baum, 58, has toned down the risk profile of her holdings, a move she made after recouping her losses.

She split the account belonging to her parents with her brother following their father's death last year.

"I feel a little bit more mature and a little bit more sober about (investing)," she said.

Despite the lingering market jitters, investors may not have many other options, experts say.

"Pensions are gone," Statman said. "It's now the world of 401(k)s."

(Read more: The investor's financial 'to do' list)

For Michael Simolo, the way to accept investment risk is to focus on the broad strokes.

An estate planner who resides in Easthampton, Mass., Simolo decided to rely on a financial advisor who selects which investments are most appropriate.

And for Simolo, who is 36, that means a big dose of stocks. While they are following the financial plan of their advisor, Simolo and his wife, Shu-Lien Wang, 38, admit that they prefer bonds.

That wasn't always the case. Five years ago, Simolo and Wang were new to investing. As the market fell, they saw a buying opportunity in stocks. They upped the $250 that was going each month into a ShareBuilder online brokerage account to $750.

They eventually dropped the ShareBuilder account and hired their current financial advisor, who has them in investments that are 80 percent equities.

Simolo said he is still leery of the market and admits if he didn't have a financial advisor he would be in bonds and cash. He did, however, say he understands the reason he needs to invest in stocks. He is doing so by placing his faith in his advisor.

"I'm generally an anxious person," he said. "It's ludicrous and unforgivable that I don't know more about the portfolio that (my advisor) has me in," Simolo said.

—By Ilana Polyak, Special to CNBC.com.

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