Retirement Lessons Investors Can Learn From The Great Recession

We all remember the Great Recession. This harrowing time saw Lehman Brothers go bankrupt, the government takeover of Fannie Mae and Freddie Mac, and losses in the Reserve Primary Fund. On a more individual basis, investors took a big hit – not only did the crisis vaporize $3.4 trillion in retirement savings, but it also wreaked havoc on home values, wages, and job security, and launched years of rock-bottom interest rates.

All of this was devastating to those planning for retirement, especially those who were poised to turn in their office keys. And, even though these events are ten years in the past, they have left an indelible mark on the minds of investors. We are all still a little shell-shocked.

Today, our job market is robust, stocks have come back, and interest rates continue to rise. But investors remain leery. We continue to feel the burn of the Great Recession. This event serves as a constant mental reminder of our retirement planning strengths — and weaknesses.

Here are some lessons investors can take away from this historic event.

1. Turn Uncertainty into Opportunity

During the Great Recession, many folks pulled out of the market. Others didn’t. Those who stayed in the market saw their investments take a pummeling, but those brave souls were also around for the rebound. They took advantage of the bargain-basement prices for good stocks during market lows. And now, many are on their way to a secure retirement.

Investing is a marathon, not a sprint. When you commit to the long haul and trust in the facts – that markets historically grow over time – you’ll be in a much better position than you would be if you’re always jumping in and out.

2. Don’t Try to Time the Market.

How your retirement portfolio fared during and after the crash probably depends on how you reacted to the plummet. Did you stay in? Pull out? Are you back in now? Are you waiting for the “right time?”

There are some folks I’ve talked to that pulled out, and then missed the rebound that happened in March 2009. Others have stayed in cash, waiting to get back in when the time is right. But, here’s the thing. No one knows when the time is right.

I’ve said it before, and I’ll say it again: investing is more about participation than perfection. So, don’t chew your nails off waiting for the “perfect” time to jump back in. Unless you can foretell the future, there really is no such thing as the perfect time.

And remember to play it smart when you do get back in. Don’t be lured into an aggressive, high-risk asset allocation because you feel like you missed out. I know you want to make up for lost time, but playing it that fast and loose could lead to more heartburn.

Focus on the long term, and settle in for the ride. This strategy is likely the best one for your investments and, in my opinion, is certainly the best for your investor emotions.

3. Keep Cash During a Crisis

I know that sticking money under your mattress isn’t the best way to save for retirement. I also know that, during a financial crisis, if you have enough cash to live on, you can avoid the necessity of selling off your investments to fund your everyday expenses. In this way, a good stockpile of cash – say between 8 to 24 months of living expenses – can save you from having to sell at rock-bottom prices. The real benefit to this strategy is that you’re still in the game once the market comes back.

4. Play Defense, Too

Investing in dividend-paying stocks can be a great way to both generate some cash and insulate your investments.

Think of it this way. If stock prices take a dip, the last things companies want to do is reduce their dividend payments – that’s a sure sign of trouble that could spook their investors. So, even if the stock price goes down, owners of these stocks typically still get the benefit of that juicy dividend. And, once you’ve retired, these checks can be a great source of supplemental income.

5. Have Checks and Balances

Investing is an emotional endeavor. You put your hard-earned money out there, and you want it to grow. But, it’s important not to let feelings like fear or greed get the best of you.

If you’re the type that loves to buy and sell, but your spouse fonder of holding and waiting, then work together to get to a place of balance. Better still, consider working with a professional to manage your investments. Not only can these folks help balance your emotions with rationality, they are a great resource to help you chart where you are and where you want to be.

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