3 Lessons Smart Investors Learned from the Great Recession

From Peter Reagan at Birch Gold Group

Depending on your media sources, one of two economic possibilities exist right now:

Either the U.S. has already fallen into recession thanks to the two most recent quarters of negative GDP growth. Coupled with 40-year-record inflation that doesn’t look to be easing any time soon, we’re seeing an unprecedented erosion of purchasing power. Prices on essentials surging month after month. Bills that just keep on rising, creating massive financial pressure on every household.

Or, you know those two consecutive quarters of negative growth? That’s not actually a recession yet. It’s only “sparking recession fears,” just like the media scolds. So stop complaining about expenses rising faster than pay! You’re part of the problem!

Well — you can probably guess which of these two scenarios I think is more accurate.

Regardless of which perspective you prefer, there’s no doubt the economy is awfully reminiscent of the lead-up to the Great Recession.

Maybe you’ve forgotten what it was like? Maybe you blocked it out? Or maybe you weren’t even old enough to be interested in the economy back then?

Well, let’s refresh your memory. Eleanor Laise from Kiplinger offered a bleak summary of the financial carnage 15 years ago:

The Great Recession of 2007-09 turned retirement dreams into nightmares. Stocks plunged as the government took over Fannie Mae and Freddie Mac, Lehman Brothers went bankrupt, and the Reserve Primary Fund suffered losses, shattering investor confidence in safe-haven money-market funds. For many, it was the most hair-raising moment in a crisis that ultimately wiped out $3.4 trillion in retirement savings.

Well. Let’s hope things don’t get that bad this time. We’ve already seen retirement accounts lose trillions so far this year. And there are reasons to believe this recession will be different from 2008.

Here’s what we don’t know:

  • how long this recession will last
  • how deep will it get
  • how high unemployment will rise
  • how far the stock market will fall
  • whether the Fed will switch gears and pour fuel on the inflation bonfire, or stick to their guns and keep slowing an already-stalled economy into reverse

We could see a hard-and-fast downturn like in 2018 and 2020.

Or we might endure a long and drawn-out like the 1930s or the 1970s.

The bottom line is no one knows for sure.

So let’s be humble, and accept what we don’t know. With that in mind, I think it’s smart to ponder lessons learned from the last severe recession.

Remember, these lessons cost Americans trillions of dollars to learn. Let’s learn from their mistakes so we don’t make our own.

Lesson 1: Trying to time the market is futile

It’s challenging to know exactly when the market will start recovering from the madness that started with the Fed’s supposed “transitory inflation.” That means trying to time the rebound this time is likely to be an impossible task.

Laise provided one good example from the Great Recession that nicely illustrates why this is the case:

During the financial crisis, Smith’s IRA dropped 75%, as individual stock holdings, such as the troubled insurer American International Group, got crushed.
Even more devastating, Smith missed the market rebound that began in March 2009. He tried various trading strategies to recover his losses, but nothing worked.

As you can see, trying to time the market rebound from the Great Recession ended up making things worse for Smith, not better. (Remember – on average, the more you trade the less you make.)

So unless you have a magic crystal ball, perhaps it’s best to steer clear of market timing and follow the next lesson

Lesson 2: Stay prudent

Olivia S. Mitchell, professor of business economics and public policy and executive director of Wharton’s Pension Research Council offered the following advice for staying prudent during market chaos:

Prudent personal financial management means not just tracking last year’s expenses and putting off major expenses, but also making sure money is available for expenses that cannot be postponed

Your roof will probably need to be replaced every 20 years or so, and your furnace [maybe] every 15 years or so. She emphasized that it is not enough to merely keep “mental accounts, but real savings accounts so that you can cover the needs when they arise.”

Mitchell’s advice means keeping focused on most secure savings and fixed expenses during times of economic volatility. When the market does start to recover, you’ll be better positioned to profit from it.

You’ll notice that her advice talks about the longer term, and to help with that, the next lesson could serve you well.

Lesson 3: Lower your risks and think long-term

If you’re being prudent, it will help to lower any risk that you can while the current turbulent market conditions exist. It could also be a good idea to think longer term, so you’re ready when the recession ends, assuming the market conditions subside.

U.S. News recently reported on relevant details from the Great Recession that could give us some perspective today.

First, the article recommended avoiding taking on too much risk and debt. Josh Simpson, vice president of operations for Lake Advisory Group offered the following advice:

To avoid being overleveraged, evaluate your current debts before taking out more loans. “There is a level of risk and reward that is acceptable when it comes to your finances, regardless of your socioeconomic status,” Simpson says. If possible, work to pay off your debts so you won’t have extra payments to make during a recession.

Also, steer clear of investments that promise a high return but carry great risk. “We just need to be aware of how much we are willing to risk and not allow ourselves to become overextended because we get caught up in the potential payoff in the end,”

Next, since a recession is likely to cause chaotic ripples in the markets for a while, a long-term view is essential. Doug Carey, owner and president of WealthTrace, explained it like this:

When an investor has a long time horizon with a retirement account, the best strategy is to max out contributions to it and don’t look at the account balance too often. The market may go down, but if you keep investing your funds you will have a chance to gain value if it goes up again.

Prices do fluctuate, but remember, prices only matter when you’re buying or selling. Unless you’re actively engaged in transactions, prices are just noise.

The last idea you might want to consider is seeking out any leverage you can find to help make things easier.

Consider investments to achieve these three goals

Everything discussed above has the potential to make an economic recession much easier and less impactful on your retirement savings.

But whatever advice you choose to follow, consider doing so now. That’s because time is running short no matter what your news source is.

Being prudent while lowering risk, taking a long-term view, and not having to time the market could all be addressed at the same time by taking a few minutes to learn whether a Precious Metals IRA meets your needs. For bonus points, check out our comparison of inflation-resistant investments to find a safe haven that’s right for you.

After all, the economic times ahead might be stormy, but today, if you act fast, you can get ready to ride out the storm and emerge from the other side into the sunshine, maybe even better off than you were before.

2022, Featured, investment, recession, retirement plan