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
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.
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