Lessons From an Economic Downturn

bad economy

As much as I hate to admit it, I tend to be a head-in-the-sand type when it comes to bad news.  I stopped reading the news after I found each day’s trending articles were upsetting me so much that I couldn’t focus on my own work.  And although I am the daughter of a financial planner and have had a lifelong interest in money and investment, I have simply stopped paying any attention to the recent stream of bad news about our economy.  I don’t feel particularly mature for this attitude, but sticking my fingers in my ears and singing “la la la” seems to be working for me.

And, as it turns out, it’s not entirely a bad idea for the average investor when all the news about finance seems to be negative.  I am insulating myself from both panic and panic-driven impulse decisions by ignoring the news.  Since investing is a waiting game, it shows good financial sense when you refuse to be swayed by momentary hysteria.

Weathering an economic downturn is not anyone’s idea of fun, but it can help you to become a better investor—and not just because it helps you to determine when to ignore trends and when to jump on them.  Here are three more important lessons to take away from the current trouble with the economy:

Lesson 1: Diversify!

A diverse portfolio is a healthy one, and it can be no more apparent than when everyone is experiencing a downturn.  If you have a well-diversified investment portfolio, chances are that not everything will be doing poorly all at once, even in a down market.  If ever you see that everything you have is going down, then it’s time to spread your eggs out to several different baskets.

Lesson 2: Know your risk tolerance.

There is no such thing as a risk-free investment.  (I personally believe that this sentence should be embroidered on pillows and given out to investors—along with “This too shall pass” on the reverse side of the pillow).  Thinking that anything is a sure thing is a sure way to delude and disappoint yourself.  A better strategy for dealing with the risk inherent in investment is to know yourself and decide how much risk you can tolerate—while recognizing that lower risk equals lower returns.

For the most part, risk-averse investors are currently watching their (slow-growing) investments at least maintain their value, while the riskier investments taken by devil-may-care investors are tanking.  If you are feeling heart palpitations over your risky investments because of how poorly they’re currently doing, then you haven’t been true to your risk aversion.  Know that nothing is a sure thing and dial back the risky investments a bit.

Lesson 3: Keep some money liquid

Down markets can offer some great bargains on normally high-performing investments.  If you keep some of the money you intend to invest easily accessible in a CD or money market account, you can take advantage of these opportunities while many others are running around shouting about the sky falling.  Taking advantage of the money to be made during a bear market not only requires a cool head, but also some cold hard cash for investing.  Keeping both will set you apart from many others—and help you to maintain your portfolio no matter the vagaries of the market.

Ultimately, it’s important for Americans to recognize that bleak economic news does not signify the end of the world, no matter what the talking heads on television might say.

Emily Guy Birken is a freelance writer and stay-at-home-mother in Lafayette, Indiana.  Her musings on life and parenting can be found at The SAHMnambulist.

Photo Attribution Some rights reserved by spDuchamp

2 Replies to “Lessons From an Economic Downturn”

  1. Emily, could not agree more. I have my own story about the economy and corporate downsizing (see link if interested) and know that when I got laid off from my job things for our family would have been disastrous if it was not for two things: 1) we had started a side business in addittion to my full time work that was providing extra cash and 2) we had saved all of that extra cash and when I was laid off we had that money and that paid the bills and kept food on the table for more than 6 months.

    I do not want to think what that period would have been like if we had not implemented the same recommendations you write about here.

  2. Great advice all around.

    I find that it is helpful to ignore investing news most of the time — during good times, regular times, and bad times. Aside from not getting caught up in the emotions of the time, it saves you a ton of time and energy.

    Your 3 lessons are all very important. Lesson 1 is easy to follow — invest in broad index funds. Lesson 3 is a little harder to follow because most people want to spend their money when they have it. Lesson 2 is extremely difficult because most people grossly over estimate their ability to stay calm. Using your stated head-in-the-sand practice helps a ton with Lesson 2.

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