By Angela Dorsey
The past has much to teach us. Whether good or bad, we can look back, learn from mistakes and victories, and apply these lessons to our current situation. So, as we experience 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 move forward. Here are 4 financial lessons the last recession taught us.
1. Borrowing Money Carries 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. You Can’t Avoid Risk Completely
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 recession-proof financial plan and a trusted advisor who can help manage your investment portfolio may greatly outweigh any risk you incur.
3. Keep An Eye On Your Money
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.
Learn From The Past And Move Forward
It’s easy to get complacent when we’ve had a bull run as long as the one we’ve just come out of. 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.
Wherever you find yourself right now, it’s never too late to implement the changes necessary to help secure your financial future and your dreams for retirement. At Dorsey Wealth Management, we are here to support you and provide knowledge, resources, and strategies for you to move forward and help try to recover from any losses you’ve seen. Get started by scheduling a free introductory 30-minute phone call today. We look forward to hearing from you.
Angela Dorsey is the founder and fiduciary financial advisor at Dorsey Wealth Management, a fee-only financial planning firm helping successful women and couples prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a Certified Financial Planner™ (CFP®) and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband and two children. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.