With so many baby boomers (people born between 1946 and 1964) on the cusp of retirement in late 2008, significant numbers of these imminent retirees were caught with their shorts around their ankles when the financial crisis struck. Anyone born in 1945, 1946 or 1947, that may have been planning to retire at age 62, 63 or 64 was devastated by this event. To put the enormity of it in context, there were almost 2.9 million people born in 1945 with annual births peaking at 4.3 million in 1957. In short, millions upon millions of boomers were and continue to be affected. Were you one of the casualties – did the meltdown wreck your retirement?
Of course, boomers born later than 1947 suffered as well. The impact of market losses on anyone over 55 must have been nothing short of bone jarring. With so few years remaining to rebuild their retirement funds and exacerbated by the fact that the jobs necessary to earn that funding were being lost in huge numbers, the meltdown pushed many boomers to the depths of despair. Perhaps you were a victim!
There Were a Lot of Victims – Did the Meltdown Wreck Your Retirement Too?
The fact is we were all victims in one way or another. In the 7 months following the crisis, the Dow Jones Industrial Average nose-dived from a pre-crisis 11,700 to an abysmal 6,500. Mutual fund investors alone sold off $200 billion in stock (many would argue, at exactly the wrong time).
Many of us suffered from derailed retirements, underwater mortgages, decimated stock portfolios or job losses due to downsizing, outsourcing, business bankruptcy or merger. For many, it was a combination of these. In short, few escaped unscathed. This is no longer news; it is history. The question for those looking forward to retirement and/or financial security is what lessons can be learned from this financial crisis?
Lesson # 1 – Avoid Debt
These lessons are in no particular order, but if they were, avoiding debt would be at or near the top. No matter what financial crisis will emerge in the future, and there will be one, it is easier to weather a crisis in a debt free condition. Imagine the difference a low debt load would make in your quality of life if you lost your job, if the value of your home tanked, or if your portfolio lost one-half its value. Everything in your post-apocalyptic life would be easier absent the burden of debt.
Lesson # 2 – Ignore the Experts!
Don?t place too much reliance on the expert advice so freely given by the talking heads, brokers, market watchers, economists and other soothsayers. Truly good advice has a price, just like everything of value. Freely given opinions are usually all over the map and being human, we tend to hear only the voices in agreement with our own views anyway. The fact is?no one accurately predicted the meltdown. Most, in fact, were assuring us of the brightest of economic futures. Rely instead on your own common sense and life experience. Your chances of calling it right are just as good as anyone else?s. This applies equally to sunny predictions and dismal ones.
Lesson # 3 – Keep Your Assets Simple
Invest in simple assets and straightforward strategies. Warren Buffet may have said it best, ?Never invest in a business you cannot understand.? Those investing in credit default swaps, convoluted hedge fund strategies and complicated derivatives were hit hard, while simple folks investing in well understood equities like McDonald?s and Coca-Cola fared quite well.
Lesson # 4 – Keep a Healthy Amount of Cash
Cash is not a four letter word. While holding cash reserves will cost you income opportunities in good times, when there is a financial crisis, cash is king. If we learned nothing else from 2008, we learned that having a cash reserve is critical to survival. What percentage to hold, in cash or cash equivalents, is up to each individual, but to have no cash reserves is an enormous mistake. Build an emergency fund!
Lesson # 5 – Understand the Relationship Between Risk and Reward
Understand your capacity for risk. Most of us understand the risk/reward concept. We understand that accepting higher risk can mean greater rewards. Higher risk investments can also spawn significant losses. Anyone planning for retirement, a child?s college education or overall financial security must address the element of risk. Deciding how much risk you are willing to accept is a critical first step in any investment strategy. There is no one-size-fits-all solution. The answer is as individual as the investor.
One thing is certain, if we fail to learn from the mistakes made in the years and months that led up to the financial meltdown, we are destined to repeat them and that is not a good plan!
H. D. Carver is an American who currently resides in Cagayan de Oro City, Philippines. He has years of experience in the financial services sector and has served as a manager for Fidelity, as the vice president of a large regional bank, as the president of a financial services company, and as the Manager of Administrative Services and Support for the Aon Corporation. He has worked as a freelance writer for 4 years. Currently, he writes for Your Finances Simplified.