Never before have we seen an economic crisis like the one we are living through. The current financial crisis will go down in history along side market meltdowns like the stock market “crash” of 1987, the burst of the tech-bubble, the 2001 terrorist attacks, and the 2008 Great Recession. The COVID-19 crisis will likely end with a revamping of global financial systems and much more transparent practices. The important thing is that we learn from this crisis on a global, national, and personal level.
Can We Really Afford That?
While many of the reasons for the current economic condition are well beyond our reach as individuals, we must learn to protect our financial selves. Historically low interest rates, coupled with rapidly increasing home prices, have spawned the era of the mini-mansion complete with a multi-car garage filled with an array of luxury vehicles, a sizeable plot of real estate, and a dog. With exception of man’s best friend, the rest may come with too hefty a price tag.
As the economy began to reveal the extent of its vulnerability, the government introduced many plans and strategies to keep America (and ultimately global economy) from going bankrupt. However, our personal entitlements are limited. As an individual, there are three people that will protect me if I default financially: me, myself, and I. That’s it! This is why it is essential that we live within our means. If we create a feasible financial plan, outlining the objectives and goals we wish to attain, we can be sure our decisions are financially sound. After all, the decisions we make today we must live with in the future.
Spread the Wealth – Diversify, Diversify, Diversify
Now that you’ve been able to save some of your hard earned money, what should you do with it? The answer is, “a little bit of everything.” A diversified portfolio is important. That means that no one stock, fund, industry, etc. makes up the majority of your investments. The strategy behind diversification is to minimize risk while limiting the overall volatility. For example: if you were heavily invested in technology stocks in the early 2000’s, your portfolio would have gone nowhere. But had you diversified your portfolio to include things like energy, financials, transportation, etc., the results would have been better. Diversification does not eliminate risk, does not guarantee a profitable investment return and does not guarantee against a loss. It is a method used to manage investment risk.
Other elements to how you should diversify include your age and time horizon (how soon you will need the funds), tolerance of risk, and your financial objective.
What Goes Up, Must Come Down
A final lesson to learn from the recent meltdowns is something we have known since we were infants: “what goes up must come down.” As investors, we must realize that no strategy, however limitless it may appear, will ever go up forever. In recent times, we can recall the “dot-com bubble”, “the housing bubble”, and “the energy bubble”. None of these scenarios could possibly be sustained; market forces just won’t allow it. Each of these seemingly impervious opportunities was filled to its extremes before the air was let out of its respective balloon. Because these sectors were so heavily invested by so many, the effects of the rapid decline were much more dramatic sending prices and sentiment even lower.
So what can we do? Again, diversify. While there is certainly opportunity in these situations, the success stories are far outnumbered by the tragedy of lost fortunes and bankruptcy. Most importantly, establish a sound financial plan and weather the storm.
Past performance is no guarantee of future results. All investments involve risk, including possible loss of principal.
Elizabeth Paal Goss is a Registered Representative of Lincoln Financial Advisors. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. 307 International Circle, Suite 390, Hunt Valley, MD 21030.Heritage Financial Consultants, LLC is not an affiliate of Lincoln Financial Advisors Corp. CRN-3098153-052220