We’ve all heard the saying “Hindsight is 20/20.” It shouldn’t be news to us that in the midst of a situation, it’s hard to see clearly, and that it’s only when you look back on it that you have a much clearer understanding of what actually took place. So, as we’ve recently experienced wild volatility, record market drops, and the beginnings of what many are calling the next recession, we have the opportunity to take what we learned from the market crash of 2007/2008 and apply these lessons to our current predicament. Here are 4 financial lessons the last recession taught us.
1. More Debt = More Risk
One of the harsh realities that many learned in the last recession (and many are realizing again) is that debt is more than simply money you have to pay back; it carries risk. The more debt you have, the more risk you carry. Having debt increases your bills, which increases your monthly living expenses, and ultimately puts a lot of pressure on you to make ends meet.
When you are approved for a certain amount of debt, that doesn’t mean it’s in your best interest to borrow that much money. When job loss, reduced pay, or another emergency comes up, you are still responsible for paying all that back. Plus, your income is your largest wealth-building tool and it’s difficult to increase wealth when too much of your income is going toward debt.
2. Some Risk Is Unavoidable
Although debt carries risk, not all risk is bad. To build wealth, you will have to entertain a certain amount of risk, whether it’s in the house you buy, the stocks you purchase, or the career you choose.
However, you can be proactive and put emergency savings for short-term crises in place, and rely on someone you trust to help you make long-term financial decisions. You can work with a professional to determine your risk tolerance level and make sure that your investments are set up in a way to achieve both growth and protection. The benefits of having a well thought out financial plan and a trusted advisor who can help manage your investment portfolio may greatly outweigh any risk you incur.
3. Asset Allocation Is Crucial
We don’t know exactly what will happen to our economy in any given month, but we do know that actively managing your portfolio can ensure that you have proper asset allocation for your risk tolerance, goals, and financial situation—namely through diversification and rebalancing.
It sounds fancy, but simply put, diversification means you shouldn’t put all your eggs in one basket. And rebalancing is making sure that your money stays appropriately allocated over time. For example, instead of having the majority of your money tied up in single stocks, you spread out that value between U.S. and international bonds, stocks, and other investment classes. Then, as your investments increase or decrease, regular rebalancing can help establish proper asset allocation to lower the overall risk in your portfolio.
4. Markets Recover
The market has recovered extremely well since the last recession, and there should be improvement again! In the course of our history, the market has always recovered—and more quickly than most might remember. This should be an encouragement to you as well as anyone concerned about their investments or retirement. Look at this graph and you’ll see the recovery over two years, starting from the worst point of the recession.
Don’t Repeat The Mistakes Of The Past
It’s easy to become complacent when things are good, and the record-long bull run we just came out of may have given you a false sense of security. Now, as we walk through our current uncharted waters, are you remembering the lessons you learned 12 years ago? Let this be a reminder to you that while we can’t predict the future or control the markets, we can take steps to make the right decisions for our money and set it up to succeed in any market environment.
No matter where you find yourself right now, it’s never too late to implement the changes necessary to help secure your financial future. I’d love to support you and provide knowledge, resources, and strategies for you to move forward—and help recover from any losses you’ve seen. Email me at jim@glhcfinancial.com or give me a call at 916-967-3208 to see if I am the right fit to help you pursue your ideal financial future.
About Jim
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources, knowledge, and experience to help his clients experience simplicity and clarity in their financial life. Jim spent over 20 years working for GE Financial Advisors, both in their insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
Jim is a member of the Financial Planning Association of Northern California and National Association of International & Financial Advisors (NAIFA). He has served as a board member of several nonprofit organizations and has been involved in Cub Scouts leadership and youth sports coaching. Jim lives in Folsom, CA, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities such as kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.
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(1) https://www.statista.com/chart/21144/s-p-500-recession-recovery/