We’ve all heard the old adage: “Those who cannot learn from history are doomed to repeat it.” And while the financial and economic crisis of recent years is sure to make the history books, it is more important to ask the question – What have we learned from this unfortunate experience?
Lesson 1: The Importance of Risk Management – Constructing your portfolio with a strong discipline that incorporates risk management techniques on an ongoing basis will help keep you from reacting in a time of crisis. For the individual investor this may mean using high-quality mutual funds or preferably, institutionally designed portfolios that utilize risk/return metrics on a daily basis to continually monitor their exposure to market volatility.
Lesson 2: Diversification Matters – This is one key lesson we all know but sometimes lose sight of. Even though virtually all asset classes declined in 2008, though not all in the same degree, a portfolio diversified across all classes did perform better than an all-equity portfolio. And historically, a balanced portfolio consisting of both equities and fixed income tends to perform well in most any environment, with less volatility.
Lesson 3: Have a Plan and Stick with It – Not to say that your plan shouldn’t be adjusted over time and if the market or economic environment dictate, but having a plan does provide guidelines and can help remove emotional responses that can derail you in times of crisis. More importantly, your plan should assess your tolerance for risk, and that risk tolerance should be re-evaluated as market conditions change. What is the threshold of worry that you can live with without saying “uncle” and getting out of the market altogether? It’s a balancing act between satisfying your goals and objectives, and making sure you don’t outlive your money. Working with a financial professional who understands your individual situation can be a key factor.
Lesson 4: Consider Adding a Guaranteed Retirement Income Annuity – If income in retirement is your concern, adding your own “personal pension” to supplement your social security or corporate pension may be a way to ease the effects of market declines on your portfolio. Those investors who had adequate income to cover their expense needs without relying solely on their investments fared much better through this down cycle, allowing their investments to come back up in value. And while there are costs associated with these guaranteed income riders, it is worth consideration for the peace of mind it can create.
Lesson 5: Markets are Cyclical – Lastly, it’s now painfully clear that just as markets go up, they also go down. But the economy and the financial markets are remarkably resilient and tend to follow fairly typical cycles of compression and recovery. Although history does not guarantee future results, it does show us that there will be a light at the end of the tunnel. We’re starting to see glimmers of that light now, but it’s going to be a slow climb out with quite possibly many fits and starts before we are on track again. But as Winston Churchill said, “An optimist sees an opportunity in every calamity; a pessimist sees a calamity in every opportunity.”
Linda Zivney is Registered Principal of Zivney Financial Group, LLC in Bend, www.zivneyfinancialgroup.com, 541-330-7590 Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC