Many people ask me if they should change their investments in light of what’s happening on the world scene today. In my opinion, you can perhaps best learn how to react to major political happenings by reviewing what happened the last time the world had a financial/world crisis – don’t miss this opportunity.
Two years ago, the economy was dying. Stock prices were about 50% of what they are today. Companies announced layoffs almost every day. Banks and insurance companies were folding. Our national deficit was (and unfortunately still is) boldly going where no deficit has gone before. If you had a job, you were holding on for dear life. And being self-employed was a frightening proposition, too.
How could this story look anything but bleak? It was understandable for people to overreact and run for cover. Despite all the financial darkness at the time, however, there were still reasons to be optimistic. In fact, here’s a portion of what I wrote to my clients two years ago:
Employment
Lots of people are out of work. That’s true and it’s terrible. But 93% of the people who want to work are working.
Banking
While banks have huge obstacles to overcome, the difference between what they pay us in interest and what they charge us to borrow makes this one of the best times ever to be in the lending business. The banks are going to thrive. And while it’s tough to get a loan, it’s very inexpensive if you are borrowing money now.
Real Estate Value
Lower prices hit those who need to relocate or downsize, but when averaged over the last 10 years, you still made money in real estate. 90% of us meet our mortgage obligations. For most of us, the loss in home values is frightening, but it’s not relevant.
And working young couples have a chance to buy a home now that they couldn’t even imagine buying only 2 years ago.
Why do I bring this up? Because as frightening as times might be, you just never know how things will work out. The last two years have demonstrated that. If you had followed your gut two years ago and bailed out of your long-term investment plan, you’d be very sorry today.
While it might be a bit shaky at the moment, especially with the recent political unrest overseas, the market has recovered very nicely from the dark days of 2008/2009. Had you bailed out at the low-point, you would have locked in your losses and found it very hard to find a time to re-enter the market.
This is a very important point, and hopefully helps you in making smart decisions about what to do with your investments right now. It’s important to understand that, despite all the turmoil in the oil-producing regions, nobody knows how things are going to unfold. You also need to acknowledge that you are an emotional being, and will have strong urges to react to uncertainty.
Perspective
If you are currently drawing on your retirement accounts, you might need to make some changes – but those changes aren’t all that drastic. For example, if the market drops, you may have to withdraw less money. Granted, it’s easier to adjust to an increase in income than to a reduction, but you can do it.
And if you aren’t pulling money out of your retirement accounts yet, you are in a fortunate position. If you currently make monthly contributions to your retirement plan, you end up buying shares at bargain prices every time the market dips. In the long run, these dips can help you to maximize your retirement accounts.
Times are very tough for people who are out of work and for those who just bought homes in the last four years. If you are in one of those situations, there are a number of things you can do to improve your situation. In fact, the site that you are currently reading has a number of great resources to help you do just that.
Look at it this way… I did not live through the Great Depression, but I can tell you that the people who did go through it would have thought they died and went to heaven if they woke up and found themselves in the “depression” we’re supposedly going through now. And if you’re buying a home now, you should be ecstatic over the low prices as compared to just a couple of year ago.
I do think the upheaval in Middle East is a watershed event, just like the financial crisis in 2008 was. The world is re-defining itself. For the last two decades, we spent and borrowed like there was no tomorrow. Now we’re in “tomorrow” and we’re cutting back and learning how to make ends meet. As the situation changes in the Middle East, we’ll adapt and thrive.
Nickle said: “Two groups looking at the exact same data, and they come to diametrically opposed conclusions.”
BG said: “And one group will make money off the other.”
and now, we can see which group was right — a 3.4% drop in the S&P 500 in four days. This is when I’m glad to have some money in Stable Value and other similar-types of assets (in my highly diversified portfolio).
It’s amazing how many people are afraid to jump back into the market…at the very least, put some money in proven dividend paying stocks, its better than savings accounts that are eaten up by inflation.
Another alternative is social lending, more specifically Lending Club. If you dont need a very liquid investment its a great investment vehicle. Ive earned roughly 15% over the past year.
I have a group of funds in my portfolio and I rarely change anything except to rebalance every six or 12 months. If a fund has not done well for a few years, I might exchange it for another fund. I rarely take money out because I have faith that my index funds will be stable in the long run.
During the down market in 2008-09, I had paper losses like everyone else. I did not sell and waited for the rebound. Now I have all of my principal back plus some.
@Kevin, your father is a rare person. Congratulations! Your comment on focus and specialization is really insightful.
@Nickel . Fascinating observation. Maybe the subject of a post?????? (Don’t write it….let me….)
“Two groups looking at the exact same data, and they come to diametrically opposed conclusions.”
And one group will make money off the other.
The problem, you can’t predict who is correct. What I learned in the past two years is to be diversified. I have investments in everything I can: stocks, bonds, reits, commodities, currencies, in both US and non-US varieties.
I know I can’t pick a winner, but I know one of my picks must be the winner — heh.
You know, it’s funny… Some people look at how much the market has risen (95% in the past two years) and say “Whoa, that’s too much too fast, we may be due for a collapse,” and end up getting out of the market. Others look and say “Whoa, I’m missing out on the market of a lifetime, I guess it’s finally time to get back in.” Two groups looking at the exact same data, and they come to diametrically opposed conclusions.
The herd appears to be very good at losing money. You had the “dot com” craze, the telecommunication craze, then the biggest, best (& mortgaged) house craze. Whatever the “hot thing” is today, it seems to be a recipe to losing your shirt.
My dad (born in the Great Depression) was a bit of an odd investor for this site. He started $5K in the discount bond market back in ’70s and now we’re worried about hitting estate tax exemptions. Not meant in the bond v. equities thing, but emphasizing the fact he educated himself in a sector of the market, stuck with it (including during the early-mid ’80’s & ’90’s when equities were the ‘hot thing).’
To learn what you are doing, in where ever you choose to invest, and have enough fortitude not to be swayed by what someone else is doing, rather make your decisions based on more a business model than casing trends, in the long run seems to lead to more solid ground.
Great article, and I agree this is hardly a depression. I look at it as an excellent buying opportunity.