How You Can Survive the Financial Crisis
When giants fall, how can the average person resist getting caught in the financial crisis?
The markets are reeling from the recent news that Bank of America acquired Merrill Lynch, a 94-year-old institution that was one of the last remaining independent holdouts on the street, while at the same time the 158-year-old securities firm Lehman Brothers has filed for bankruptcy protection. And the bad news doesn’t stop there. American International Group (A.I.G.), still woozy from the credit crisis joined troubled mortgage finance companies Fannie Mae and Freddie Mac in receiving a bailout from the Federal Government. The Dow dropped 449 points on the news of the AIG bailout. And shares in the last two independent investment banks, Morgan Stanley and Goldman Sachs fell precipitously on fears that they might go the way of Lehman and Merrill.
Coming on the heels of the forced sale of Bear Stearns to JPMorgan Chase earlier this year, its more than enough to make the average person wonder if our entire economy is on the verge of collapse. When such seemingly solvent financial institutions get shaken to their foundations, it leaves a lot of rubble.
So what can you do to make sure you are protected?
Don’t Panic
Resist the tendency to respond emotionally. The Three Principles of Personal Finance haven’t changed just because Lehman Brothers made some poor financial decisions. Stick with the three principles and you will be prepared for any crisis.
- Spend less than you earn
- Make the money you have work for you
- Be prepared for the unexpected
Don’t try to time the market
Dollar cost average your way into the market instead. Dollar cost averaging is an investing approach that reduces exposure to the risk associated with making a single large purchase. Spend a fixed dollar amount at regular intervals on a particular investment regardless of the share price. More shares are purchased when prices are low and fewer when prices are high.
By following the most basic investing principle, “buy low, sell high,” you can turn the market volatility to your advantage and lower your average cost basis. This means higher returns when the market eventually rebounds.
Take a long-term approach and keep making regular, steady investments into your 401k & IRA. Bull and bear markets cycle through every few years. Many investors saw a growth in their portfolios in the 90’s only to see their profits dissolve by 2002. But the ones that panicked, abandoned the stock market, and put what was left of their remaining assets into low-yield CDs were not well positioned for the rebound that occurred between 2003-2006. Keep this simple fact in mind. According to Jeremy J. Siegel, there is not a single 20-year-period in the last 100 years where the stock market has not increased in value*
Still worried? See if your employer offers dollar-for-dollar 401k contribution matching. That’s like getting an instant 100% return.
Diversify
While consumer financial services are down 54% over the past year, healthcare has outperformed the S&P 500 by 10% - just a few years ago, the situation was reversed. Rather than investing in a single stock or single sector of the economy, look for mutual funds that invest across many businesses. Another option, index funds, which are less subject to seismic shifts in the market because they are based on a set of rules of ownership that remain constant, regardless of market conditions.
Remember these principles when making investment decisions and you can rise from the rubble.
* Stocks for the Long Run, by Jeremy J. Siegel, McGraw-Hill Companies; 4nd edition (November 27, 2007, ISBN 9780071494700)
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What Is “The Economy”?
Its very easy look at who is screaming the loudest that the government must do something. These are the people that have been benefiting from the distorted and over valued assets that are starting to unwind. They know that the gig is up. The profits taken over the past decade on Wall Street by hedge funds and the like are not real they are a bubble filled with nothing but hot air. They were not producing anything of real value or at least not of the value they were claiming. So, what do they do now?
http://digg.com/political_opinion/What_is_The_Economy
None of these tips protect you from the inflation this runaway debt and expanding money supply would cause if things really broke down. The only way to hedge against that is to buy foreign currency or physical assets that are good stores of value, like precious metals (gold, silver).
Exactly, inflation is causing even the online savings account to be less effective. Vanguard has an inflation protected fund that returns 5.5% but Mr. Grossman is right, only way to hedge is the foreign currency but even todays market happenings prove that can be volatile. Not many answers right now till our politicians work come to an agreement on this bill.
You have the CEO of a web startup giving financial advice? I like your product but Aaron Patzer doesn’t know anything more about personal finance than any other person.
Congrats Aaron!
I accidentally found this via Inc’s 30 under 30. I went to Central High School and remember you. Wow!
I can definitely identify with the living in a place with almost nothing.
I am really, really happy for you.
Wishing you many more years of success. (Of course, you’d always knew you’d be there:)
I don’t think Aaron knows about personal financing. Personal financing is that personal. People choose what it is best for them. There are risky people who like to gamble their money and be rich, there are conservative people save dimes and when inflation hit, they die. People who think the golden rules they learned wherever apply, they don’t. You work based on the dynamic of what is not only any set of principles that you’ve accustomed to.
Seriously, does Aaron know what he is talking about?
Attempting to sum up his book “The Future of Capitalism”, Professor Lester Thurow Says: “Since World War I The US has had four financial crashes, eleven recessions and one great depression. The intrinsic problems of capitalism are visible at its birth: instability, rising inequality, a lumpen proletariat (the decrease in work force) are still waiting to be solved . . . I suspect that if every newspaper in the world tomorrow were to have the headline Globalization Ends, I think far more than half of humanity would feel relieved.”
Great article! I love how you spell out the 3 principles of personal finance. It doesn’t matter what lifestyle you have - whether you like risk or not - these 3 rules still apply!.
Yes I think Aaron does know what he is talking about!
Great article! I love that you brought it all back to the 3 rules of personal finance - it doesn’t matter what your lifestyle or risk threshold is - these 3 rules still apply.
You are right on Aaron!
Melanie from http://www.transformyourmoney.com
Jack & Joe -
This isn’t just Aaron who says this. Would you accept these words if you knew they came from Jack Bogle, the founder and former chairman of Vanguard?
Dollar cost averaging, staying the course with a long-term investment plan, determining your willingness to accept risk and allocating your assets accordingly, diversification, keeping your investment costs low — these are all very sound pieces of advice.
You don’t have to believe me though…
http://www.amazon.com/Bogleheads-Guide-Investing-Taylor-Larimore/dp/0471730335
Let’s take a look at the unprecedented. For example here:
http://www.chrismartenson.com/crash-course
There will be at least 200 smaller banks that will need government assistant or will be acquired by larger entity due to credit crisis or simple market competition. There are no losers without winners - stronger banks will survive and will only benefit for this crisis by acquiring larger portions of markets.
Saving is always a good idea, investing in something that will bring you money back is even better. Despite weak economy, now is a good time to invest and the key to good investments is making sure you are insulating yourself from things that can hurt you. Invest in equity funds such as stocks and mutual funds, bonds or as simple as High Yield CD’s.
The three rules to follow are great. One can also follow a budget to control spending and aim to pay off all debts to be financially secure during this economic crisis.
Ahh the number 1 rule of surviving a situation: Dont panic!