Lessons Learned from the Crisis
Turning Lemons Into Lemonade: Learning From the Financial Crisis
It’s been said that those who do not learn from history are doomed to repeat it. Unfortunately, those in charge of many of our leading financial institutions don’t seem to be absorbing some of the lessons provided by the recent financial crisis. However, that’s no excuse for why we as individual investors can’t be better students of disaster, learn from recent events, and emerge as better investors as a result.
Learning from our mistakes
The bottom line is that you are not the same investor you were a year ago, or three years ago. For that matter, you’re not the same employee, saver, or real estate owner, either! There are a few key areas where things have changed drastically for Americans in recent years — fortunately, there are also some important lessons we can take away as a result.
• Spending vs. Saving
If Americans know how to do one thing, it’s spending money! Before the financial crisis, the national savings rate was actually negative, as people borrowed and spent more money than they made. Now, after getting hit by financial hardship, Americans are tightening their purse strings and remembering how to save. In fact, the national savings rate has jumped to almost 8%! While that’s great news, folks should make sure that they’re still participating in the stock market. Inflation will eat away at your savings if you don’t get a decent return on your investment, and the stock market is one of the best long-term return-generating machines around! So feel free to add to your emergency cash stash, but make sure you’ve still got a foot or two in the market at all times.
• Availability of Credit
A big part of what powered consumers’ buying power in recent years was an abundance of easy credit. In the good old days, credit flowed fast and furious, and Americans loaded up on mortgage, automobile, and credit card debt. Now, credit is not so easy to come by, and people with less-than-stellar credit histories are finding it difficult to get loans. While it is much harder to get access today, we all need to make sure we’ve got some credit accessible to us to tap in times of need. Just as folks are retrenching in the savings department, use this time to clean up your credit record as much as possible. You want to have a line of credit available to you, even if you don’t have to use it.
• Investing in the Markets
Just a few short years ago, the investing climate was one of high-flying excitement. Risk-taking was in style, speculating was rampant, and investors frequently shunned steady, long-term gains in favor of immediate profits. Now, after suffering one of the harshest bear markets in decades, investors are running scared. Fear is the order of the day, and many folks are sitting on the sidelines, waiting for the stock market to continue rising before getting back in. Of course, if you wait until things look safe, you’ll already have missed out on most of the rebound! Remember that old saying about buying low and selling high? That means the time to buy is now, when prices have been beaten down and people are afraid to invest. Keep investing regularly in your 401(k) or other retirement plan, even in downturns. Years from now, your portfolio will thank you!
• Real Estate
Few sectors of our economy have suffered as much in recent times as real estate has. Years ago it seemed housing prices had nowhere to go but up and anyone could make a tidy profit flipping houses in a hot market. But after suffering harrowing drops in value and skyrocketing foreclosure rates, housing has turned downright chilly. This doesn’t mean that owning a house is a bad deal — it’s still a smart goal for most Americans. But homeowners are going to have to keep their expectations in check and avoid buying more house than they can actually afford. Slow price appreciation will be the order of the day, not double digits gains year after year. Real estate investing shouldn’t be like gambling, so don’t treat it as such!
Ultimately, one of the biggest lessons we need to take away from this whole mess is that moderation is key — investors need to be realistic with their expectations. You can still reach your long-term goals, but there isn’t a get-rich-quick path to this destination. Building wealth will take time and discipline. And that’s one lesson you can take to the bank.