By Adam Oerther, CFP®
Officially, the “Great Recession” was the period between December 2007 and June 2009 when the U.S. economy contracted by 4.2%. Over 8 million jobs were lost, and unemployment rose to 10%. Many who bought homes in 2006 and 2007 suddenly found themselves “underwater” in their mortgages (owing more on their homes than their homes were actually worth). The S&P 500 stock market index lost about half of its value until it bottomed out on March 9, 2009.
From an individual standpoint, there’s not much the average person could have done to predict or counteract the Great Recession—even some of the best and brightest got it wrong. However, while it is nearly impossible for any one person to prevent such an immensely devastating event, there are several ways individuals can help themselves (and their families) prepare for another such event when it comes to their personal finances:
1.) Have an “emergency fund.”
According to a 2018 Bankrate.com survey, nearly one-quarter of Americans are living paycheck-to-paycheck with nothing to fall back on in the event of a large, unexpected expense, and just under another quarter have less than three months’ worth of expenses saved for such an event. While it’s not pleasant to think about, the reality is these events can and do happen—people get sick, lose their jobs, and replace costly items (e.g. the roof of their home) every day. Having three to six months’ worth of expenses in a savings account can be a tremendous way to cushion the impact these expensive incidents can have.
2.) Diversify your investment portfolio.
Most people have heard the old adage “don’t put all your eggs in one basket.” When it comes to investing, this sentiment cannot be overstated. While one would be thrilled to pick the next Microsoft or Google, the reality is it’s very, very difficult to predict which single company will have the best gains over the next 20+ years, and placing all of your hard-earned savings into an investment in only one company—or even just a few companies—is more of a gamble than an investment. During the Great Recession, insurance companies, like AIG, lost over 90% of their value, but some “defensive” companies, like Walmart, actually had positive returns! Thus, it is important to have exposure to various sectors of the economy (i.e. healthcare, finance, technology, etc.) to reduce the chance that any one sector doing poorly will have large negative consequences on a portfolio.
3.) Choose an appropriate asset allocation.
An asset allocation is simply the percentage of a portfolio that is invested in the various asset classes (traditionally stocks, bonds, and cash). Each asset class has a different level of risk associated with it, with stocks being the “riskiest” and cash being the “safest,” which is why choosing the appropriate mix of the various asset classes is essential. That being said, choosing an appropriate asset allocation can be tricky—everyone has a different appetite for risk. However, in general, younger people should have more of their portfolio allocated to stocks, as they typically have higher returns over the long-term, and those closer to or in retirement should have a sizeable portion of their portfolio in fixed income or cash investments, as these assets are more predictable and have much less volatility (“ups-and-downs”) associated with them.
Here at B&C Financial Advisors, while the S&P 500 index was down about 38%, our average client was down significantly less, due to having a portion of their assets invested in fixed income, which allowed them to recover the losses in less time than if they had all of their assets invested in the stock market. More important, however, was each client’s asset allocation was appropriate for their age and financial goals.
4.) Stick to the plan.
One of the most difficult aspects of investing is not allowing emotions to dictate investment decisions. News seen on TV or read online can have a very real impact on one’s emotions, which can lead to knee-jerk reactions and poor investment decisions. For example, someone might hear stocks have been doing very well recently and think now is the time to hop on the bandwagon and buy some for themselves, when, in reality, stocks may be overvalued and “due” for a correction. This is another reason it is important to choose an asset allocation that is appropriate for your personal financial situation and stick with it—trying to time the ups-and-downs of the market, especially based primarily on emotion, can be a dangerous game.
A common question financial advisors get from clients is, “So, what’s going to happen with the market this year?” Interestingly, every advisor might have his or her own personal feelings about the market, but, ultimately, the market does not respond according to anyone’s personal predictions. Therefore, what is important when it comes to investing is to practice financial discipline, like the ones described above, and not deviate from the investment plan based on personal emotions. While no one can control the market, certain risks being taken can be controlled (through appropriate asset allocation and proper diversification, for example).
At B&C, we pride ourselves on providing an exceptional level of financial discipline. We get to know our clients and their financial goals to ensure we design and implement a financial plan that is personalized to their needs. We also monitor and adjust the plan with our clients as their personal and financial lives change over time. Contact us today to begin your personalized financial plan.
The information presented in this article is for educational purposes only and is not meant to provide individual advice to the reader. There is no guarantee the information provided above relates to your personal situation. All financial situations are unique and should be advised as such.