It’s not news to say that the economy and the financial markets have been under a bit of a dark cloud for the past few years. Somewhere in all of the uncertainty and bad news lie many lessons for making better financial decisions in the future.
Lesson 1: Don’t believe everything analysts say. One of the biggest reasons for the financial crisis is that investors didn’t do enough due diligence on their own to understand what they were buying and why. Knowledge is power!
Lesson 2: Whenever you leverage a purchase (home, car, investment), the impact of a negative performance is magnified. Leverage isn’t bad, it just magnifies the resultant tradeoff of risk vs. reward.
Lesson 3: We’ve seen this before. Some of us remember the financial engineering of the 80s (just replace mortgages of the 2000s with junk bonds) and some of the causes of our current crisis will sound familiar. Behaviors like over-optimism, short-term focus, and self-serving bias can lead to trouble.
Lesson 4: Attitude and sentiment are important. Valuation and study make a difference, but attitude is critical! Very similar to the pre-dotcom crash, many investors flocked to the soon-to-crash “latest craze” at the very moment things tanked.
Lesson 5: Keep a long range focus and be patient.
Lesson 6: Be prepared. How many families have either relied on their well-planned cash reserves, and how many families had wished they’d had an emergency cash fund? Be absolutely sure that your cash reserves are sufficient for your circumstance!
