As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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Friday, 4 April 2014

How a Financial Crisis Can Help Your Retirement

By Joe Udo

It's been five years since the global financial crisis, and the stock market has made a remarkable recovery. The S&P 500 rose 125 percent and is now at an all-time high. The bull market has been great for many of us who kept investing through the difficult years. Financial downturns can actually be good learning experiences. If we encounter a crisis early in our investing journey, we have plenty of time to recover and learn from our mistakes.

A recent study from Fidelity found that American households have made huge strides in their personal finance habits. Many investors have taken the following steps to secure their finances further:

Save more. Investors increased their retirement contributions over the last 5 years, which means they are likely to be more prepared for retirement.

Better prepare for the unexpected. Many households have reduced their personal debt over the last few years. They also started or increased their emergency fund. Unexpected events will have less of an impact on your life if you have adequate savings to cushion the blow.

Rethink risk. Many investors sold stocks during the downturn and shifted to bonds. Of course, it's difficult to know when to get back in and a lot of people missed part of that 125 percent S&P 500 gain. Investors need to examine their risk tolerance to figure out a plan they can stick with over the long term.

Many investors lost a lot of money during the financial crisis, but the long-term lessons we learned are invaluable. There will be another financial crisis in the future, and we need to apply these lessons to avoid losing even more money next time. It's much better to go through these financial crises when you are young rather than when you are getting ready to retire.

Investing opportunities during the financial crisis. For younger investors, the financial crisis was a boon. It provided an opportunity to buy stocks at bargain basement prices. Even if your portfolio lost 50 percent of its value, it is still a small amount in the grand scheme of things when you're young. Young people didn't have a huge amount of money to lose. When you're starting out, it's more important to increase your saving rate and to learn how to invest for the long term.

It's also good to go through a big correction so you can see how the stock market recovers. You can learn from this experience and be more prepared for the next downturn. The downturn was an opportunity to figure out your risk tolerance and your target asset allocation. Many investors thought they could handle a stock market drop. However, when the S&P 500 dropped 50 percent, they really couldn't handle it. If you set your risk tolerance correctly, then you should be able to stick to your asset allocation plan and ride out the down years.

Once you have a long-term plan and a good asset allocation target, you just need to stick with it and rebalance occasionally. Of course, we all change as we get older and you will need to reassess your risk tolerance every 5 years or so. Most of us will become more conservative and our portfolio needs to reflect that.

Personal finance lessons. Even if you don't follow the stock market, a personal financial crisis can be a good learning experience. If you lose a job, you will learn to cut costs and keep some emergency funds for the future. If you lose a house to foreclosure, then you will know not to buy too much house next time. Losing a well-paying job can be difficult, but you will learn how to live a moderate lifestyle and avoid overspending. These financial setbacks can be tough, but if you have an open mind you will learn from your experience.

Joe Udo blogs at Retire By 40 where he writes about passive income, frugal living, retirement investing and the challenges of early retirement. He recently left his corporate job to be a stay at home dad and blogger and is having the time of his life.

9 comments:

  1. 1. AFC in 1997/98 taught me that your salary, bonus, and job is not guarantee and it is better to be debt free as early as possible. One thing that I still doing faithfully year after year is to spend my last year bonus and current bonus is reserved for the future 1-2 years. In this manner, good times spend more and bad times tighten belt.

    2. GFC in 2008/09 taught me "Your Account Size Really Matters". Your investing capital can deplete faster than the market slide. Got opportunities but no capital. Biggest investing mistakes committed in once or twice in our lifetime investing journey to get rich from the stock market.


    ReplyDelete
  2. For me,
    Had chickened out in Mar. 2009 because committed too much capital in the market already (too much pain, couldn't take it anymore)...Not in terms of capital available but in terms of cold hard cash.
    Also always want to sleep well at night for who knows when the market will rebound or not? If rebound, when? How soon?
    Alas caught by surprise the market rebounds from 2009 to now.
    Anyway use to it already...to be caught by surprises when the market bubbles at the bottoms and also at the tops.
    Ha! Ha!
    And that's investing to me.
    Still survive, i thank GOD.
    Shalom.

    ReplyDelete
  3. i don't agree with 1, i follow good times tighten belt and bad times spend like hell.

    i remember during GFC i bought a sofa set for $450, it was sold around 2,000 just before GFC as i was told haha.

    as for point 2, i still no clue how much to keep reserve for the big one should i invest. 30%? anyone???

    oh temperament, can teach me how you sleep peacefully while fully invest?

    ReplyDelete
    Replies
    1. by the way, the sofa set had since throw away, my cat destroy it!

      Delete
  4. You mean spend more from past saving during bad times and save more during good times to spend in bad times?

    Value for money!

    Value Savers?

    ReplyDelete
  5. Hi coconut,
    You have misread me, i think.
    Read again:
    "Had chickened out in Mar. 2009 because committed too much capital in the market already (too much pain, couldn't take it anymore)...Not in terms of capital available but in terms of cold hard cash."

    Ha! Ha!
    i think the only way to sleep well at night even fully invested is your assets allocation and cash flow is robust enough to withstand a 3 to 5 years really bad bear market. It is very difficult to achieve this leh.
    So, so far i have not invested fully after since when i first invested in 1987/88. But then at that time, we (my wife ) depended on our Human capital plus no debt.

    ReplyDelete

  6. We are most nervous when the biggest winning opportunities right in front of us and we chicken out!

    Next Bear must everyday recite "Stock Market Sutra" to calm our investing mind!

    LOL!

    ReplyDelete
    Replies
    1. haha, just treat the next GFC as GSS. the great singapore sales! and the GSS as GFC.

      right now i need that sutra to calm my speculative mind.

      Delete
  7. Yes if we invest fully, can we sleep well at night?
    Must always remember we are not sure when the market will rebound?
    Or even rebound at all?
    Meanwhile how are your other assets behaving?
    Are they generating enough cash flow?
    Will they get into temporary cash flow blockage?
    If we have cash flow blockage, can we sell some of our assets?
    Not stocks please.
    Hopefully not at a great loss.
    But it usually is, if force to sell to unblocked our CASH FLOW.
    But may be your HC can tide you over?
    For me, ZERO HC already.(CHIAT KAKEE)

    ReplyDelete

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