Recently it was just the ten-year anniversary of the GFC (The financial crisis of 2007–2008, also known as the global financial crisis). And the memories and feelings of the GFC are still very much again even though it was ten years ago. Now often during my economic planning meetings, clients will ask me is there going to be another GFC? And my response is always the likewise, absolutely there will be other forms of economic crisis, terrorist attacks, health care crisis, political disasters, and environmental disasters. They will all continuously happen year after year. They will just come in with different levels of severity and in various disguises. But there are some very similarities and characteristics, that we can look out. And most importantly there are some critical lessons that we can learn from looking back in history. So that when these crisis’s do happen, the financial damage is limited, and it can quickly fix, and we can soon get back on up half of wealth creation, or potentially even use it as an opportunity to capitalize on, and possibly leverage our financial opportunities further.
But the point is we must be wise; we must be sensible, and we must be informed and aware of what we’re doing.
So in this article, I am sharing with you the lessons that we need to have learned going forward if we want to be sensible, wise investors, from previous economic crises.
Lesson number one:
Not looking at where we are on the investment and economic life cycle. The life cycle does not lie when we experience euphoric times where everybody seems to be making lots of money in it. Everything’s growing in value and making great returns; these times often encountered with the opposite of that. Where the returns are negative, unemployment might be high, interest rates might be high, consumer confidence plummets, now there is a very oversimplification of this. But fear and greed drive the market. If you can learn to step back before you invest, have a look at where we are on the lifecycle, whether there’s value in the market, then decide as to when and how you are going to invest. So be sure that you do your investigation and carefully watch before you start spending. And of course, always consider dollar cost averaging through a changing market to help smooth out your entry price.
lesson number two: looking for high returns
Now everybody wants high returns on their money, but with very low risk. However, we can’t have our cake and eat it too the pendulum swings both ways. The more of a return you expect to receive, the more significant the risk you need to take. Now again you need to do your research and understand how much risk you’re willing to take for that particular return. And of course, you need to be reasonable and sensible. So do your research before you invest.
Lesson number three: gearing excessively
During the GFC, a lot of people who borrowed money really shouldn’t think. And those people who could borrow money borrowed far too much. Now when it comes to borrowing to invest, it can work effectively to help you build wealth. But the general rule of thumb to avoid things like margin calls is do not borrow more than an LVR of fifty percent.
Also, I recommend that you borrow conservatively, borrow what you can afford right now. And always factor in a three percent interest rate rise, so that the cost of borrowing increases you are not caught out.
You can continue to afford to service and pay down that investment loan. So at the end of the day borrow what you can afford right now, and do not get greedy.
Lesson number four complex investment products
during the GFC, some crappy junk style investments, were structured in an exotic, complicated way. After which a layer of the layer, they were then sold off as Triple-A grade investments.
Now, of course, they completely fell apart. But if you come across investments that you do not understand, do not proceed until you know what you’re doing you know the risks, and you know that they’re going to work for you and your goals. Do all your research before you invest. And remember sometimes the most straightforward investments are often the most powerful ones.
Lesson number five: not diversifying your portfolio Different markets perform differently in different economic conditions.
There is a negative correlation between different asset classes and different investment markets. For example, the Australian share market may be thriving, while the Australian residential property market may be struggling. Or US stocks might be on a massive rally whereas the Asia stocks may be plateauing. It is so important that you diversify across the different investment classes as well as various asset classes.
By doing this, you help smooth out the overall returns and reduce the volatility. Now, this is why it is so important to understand your risk profile. Because when you know your risk profile, it then gives you a guide to work towards how to structure and build your investment portfolio.
So always diversify your portfolio and asset allocation according to your risk profile.
lesson number 6 hitting the panic button when an economic crisis happens
When there is a significant pullback in the market and your portfolio drops in value on paper, and then you panic and decide to sell your entire portfolio. You are crystallizing those losses. You are looking them in and by doing that means you miss out on any recovery. That also means you miss out on earning any passive income, that’s passing during that process. And let’s be honest you also may be missing out on a great buying opportunity, where you potentially pick up more of that investment at a lower price and lower your average entry price.
So when the value of your portfolio drops does not panic! Focus on your long-term goals, and remember human endeavor prevails. History does repeat itself, and markets do eventually recover.
Lesson number seven: is not having emergency money or not even attempting to pay down debt.
It surprises me the number of people out there who have no emergency money! Nothing to protect them in the event of them losing their job, or suffering a significant health issue. It similarly surprises me the number of people out there who have loans that never actually pay them down or even worse, let them accumulate, and the debts get bigger and bigger. It is incredibly toxic to your financial situation and your financial health as well as mental, health to be sitting in this type of situation.
Yes, some debt is good debt and that it helps you grow your wealth. But there is a lot of toxic debt out there. We need to learn to pay that debt down and minimize it in our lives to use that in a helpful way that helps us build capital growth and build passive income streams. And create more financial harmony and independence for ourselves.
Now if we can understand the signs of the investment market. Learn from these mistakes. We are going to become much wiser, much more sensible, and much more intuitive investors. And we will, therefore, be so much more confident and comfortable in the investment decisions that we make.
We will understand the risks that we’re taking, and we will know how they are all working towards our long-term financial goals, and of course, we’ll remain, emotionally stable and rational when these economic crisis has happened.
We may even get excited about them because we understand I can see the potential opportunity that exists within these crises.
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