Learning From Financial Downturns

Learning From Financial Downturns
Booms and busts are invariably a part of economic cycles. Every economic downturn that accompanies a boom period presents an opportunity for reflection and learning. What lessons can we gleam from this more recent financial downturn that can help us manage our money more prudently? Well, there are several:

1. Distinguish between hype and reality. Every bubble, whether an occurrence in the equity markets, the housing sector or even in the collectibles market, inevitably comes to a conclusion. Nothing can go up endlessly. The housing bubble, particularly in exorbitantly high-priced coastal communities, was basically gambling. Unfortunately, there are many who have been left "holding the bag." They overreached and are financially struggling; a significant portion may never be able to recoup their losses. Never get caught in the trap of the false euphoria, confidence and hype that accompanies a financial bubble. Approach the ensuing hype and momentum with a "healthy" measure of skepticism. Is real estate really a “sure thing?” Perhaps, housing prices do not trend upward all the time. Do not ever fall in love with a stock or a particular company. Avoid chasing yield without regard to safety. No one can predict market timing. Even the "experts" can be wrong. If you made a quick profit in house flipping, consider yourself extremely lucky. There are no genuine short-cuts to wealth-building.

2. There are no guarantees when it comes to investing. This is sadly exemplified with regard to dividend income. What investor isn't looking for high-yield dividend stocks? Unfortunately, many individual investors, particularly retirees, who held large chunks of dividend-paying stocks in the financial sector and relied upon the income have experienced the pain of not only seeing the share price of their "reliable", "solid" stocks plummet but their much needed dividend payments have also been significantly cut or suspended. Losing dividend income is hard for anyone, but especially, for those, such as retirees, who “count” on it. Never count on a dividend. A dividend payment is never guaranteed. Even the most stalwart companies, many of which have a long and illustrious history and an established track record of paying dividends, can experience financial difficulties and in some cases, eventual insolvency.

3. All the money you have is truly all the money you have. Gear your mindset towards always preparing for the proverbial “rainy day.” Save, invest and spend money from the standpoint that every dollar is precious. Consider how hard you had to work for the money. In a practical sense, the money is a finite source. Avoid risky behavior such as taking out cash advances from credit cards. During prosperous times, when jobs are plentiful, when your stocks go up every day, and home prices in your neighborhood are increasing at a frenetic pace, it is almost unimaginable that there will not be more money! Yet, it is not a given that a higher-paying job will be effortless to secure or that there will even be a job for that matter! Or, that the value of your home will increase by 20% annually.

4. Maintain a realistic attitude. Many individuals feel despondent if they have not achieved the same level of financial success as their friends or if they read in a personal finance magazine that one should have a $1,000,000 by the time they are 48. How many individuals aged 48 really have a $1,000,000? And, even if they have that sum, financial security is still not necessarily guaranteed as they could make a reckless investment decision and endure a loss. Worrying about how much you have or don't have in comparison to others is a negative distraction which will impede your financial progress. Instead, focus on formulating a financial strategy that is uniquely yours; one that is customized to your individual temperament, needs and objectives.

For informational purposes and not intended as advice.

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