Wednesday, September 16, 2009

Lessons From the Crash

The article Survival Stories and Lessons from the Crash got me thinking about my own lessons from the financial crisis. Here were the three insights I had from the recent financial crisis:
  • Don't underestimate downside risks. Housing prices falling significantly. Blue chip stock prices losing up to 90%, e.g. GE. A lost decade for equities. GM and Lehman going bankrupt. A financial crisis bringing us to the brink of a depression. Who would have ever predicted these occurrences in 2007? Few, if any, thought these events would never happen. My learning is to never say never :-)

    For us, our major downside risk is the percentage we have invested in my company stock. Although we have made some reductions, it still represents about 50% of our liquid net worth. As the market recovers, we will definitely sell some shares.

  • Take some money off the table when the going is good. It never hurts to take profits. In some cases, this is done through rebalancing. In hindsight, October, 2007 would have been a good time to sell some equities.

    I did end up cashing out of some company stock, close to the 2007 high, in 2008. Just not enough :-)

  • Build a margin of safety. Call it an emergency fund, cash equivalents or whatever. Having some funds in cash, even though at low yields, to cover job loss, market declines or a major expense. In the past, I would have been satisfied with about a year. Now I think two to three years is a good target. Personally, we are consciously maintain an amount to cover four years.

    Also, target for more savings than the minimum needed for early retirement. If I had retired at the minimum, our retirement would have failed in early 2008.

  • Hopefully, the final lesson from the crash will be "this too shall pass." With an economic recession, there will come a recovery and a new bull market. At this point, we plan to stay sufficiently invested to benefit when the next bull market starts.

    Disclosure: At time of publication, I own shares of GE.

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    This is not financial advice. Please consult a professional advisor.

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