There are many lessons to be garnered from a financial crisis, the downside is that for most people 99% of the lesson is delivered only in hindsight.
Today we will look at some of the lessons you can take from a financial crisis and use them (or at least understand them) to your advantage. If we accept that risk (including upside risk – which is generally well loved!) is a reality then you can do your best to look objectively at this risk and what to be aware of.
1. The Government and Banks or Big Business are not there to help you or warn you: This is fairly straight forward but a surprising number of people feel that the government should have stopped house prices from falling, now we see people calling on the government to get the housing market kick started again and the singular binding feature is that in both cases nothing is done. Banks are just the same, in the USA Bear Stearns issued statements saying they were doing well only two days before being handed over to JP Morgan! One may argue that ‘it’s different here’ but banks are banks, money is money, and the way it works changes little due to borders.
Recently we have seen Irish financials take record losses on share prices, they are desperate to maintain confidence and are doing so (in the case of AIB) by issuing an interim dividend, how this is funded while dropping rates/margins (as they did yesterday) is anybody’s guess. Irish banks also made news by being amongst the highest paying deposit takers in the UK. I look back to the days of the S & L crisis in the USA and recall that the banks paying the highest interest were actually in the most trouble, the move was made in an effort to attract deposits so they could stay afloat. Fast forward 17 years and we saw IndyMac doing the same (now taken over by the FDIC). So are the rash of Irish banks paying great rates something to celebrate or be worried about?
2. Don’t Freak Out!: In a market like this it’s easy to lose heart and make bad decisions. Only recently I was toying with the idea of selling a property at a loss, then I thought back to why I bought it in the first place and how I could work towards making it a better investment. I came up with a plan and am pleased to hold now, for eternity if necessary. I am also a fan of the falling axe. To get the deposit for my current home I sold Elan shares which I had bought at €1.75, I sold at €6 and was ecstatic at the profit made on them (they were bought back in 2002).
Later when the share price rose to €20 it turned into a ‘the one that got away’ story but that doesn’t mean a 300% profit was a bad thing! This week I bought Elan again, as the axe fell on them, their management are well able to survive a crisis, they got through worse before. It is also a time to consider financials, BOI shares and many other financial firms are at historic lows, if they can pay dividend it may be a great buy. There is a conflict however between what will happen. This week PTsb will announce figures, I am personally hoping (despite share holdings etc.) that they do what is required rather than what is ‘wanted’ and opt to use the money to keep the firm fit rather than to appease.
3. Make a plan: Do you even have a financial plan? Never mind one that considers downturns and what to do in them? Do you have a financial adviser if you don’t know how to do this yourself? We have never done a survey, but the feeling amongst many advisers is that most people spend more time per annum thinking about and planning a holiday than they do thinking about and planning their finances (which will actually pay for said holiday!).
Ad hoc planning is ‘monthly budgets’ and ‘not spending too much’ but actual financial planning is something that takes place over the course of many years, and by doing it you can easily accumulate considerable wealth, but you do need to know how and get familiar with some of the basics. The people who weather downturns -it could be argued any misfortune- the best are those who were prepared.
4. True Money: Gold is true money, an ounce of silver in the late 70’s would buy 4 gallons of Gas in the US, today the same holds true although the actual paper money amounts have changed so much. If you bought gold six weeks ago and sold today you would be facing an insane loss. However, that is not the point of holding gold, the point is that some day in the future it will still be a true holder of wealth irrespective of what fiat currency does, if the dollar goes bang, or the Thai Bhat hits the wall gold will always reign supreme.
Countries that have seen this happen tend to have a preference for gold, the Vietnamese are some of the largest gold investors there are (as a percentage of population) so much so that gold imports are now banned because the government there fears it may actually oust their official currency.
5. Find Answers: Many people say that there is so much ‘gloom and doom’ regarding the mortgage and financial markets that it is getting them down, well… Imagine how stockbrokers feel? If you are a stockbroker imagine how an unemployed construction worker feels, keep going down the line (if you must) until you think about how a person in Africa with insufficient food to feed their family must feel. Remember this: it’s only money, if you had a choice of losing your limbs or a shed load of cash the shed load of cash would be gone.
The reason I say this (and I’ve been horribly broke before so I speak out of experience not piety) is that sometimes you only find amazing answers because of the problem, without the initial problem you would never advance. Case in point is my own, I tried to start a business years ago and failed miserably after which I returned (as I said I never would) to the finance industry which is my real home.
6. Beat the Recession: You will outlast the recession, even people who came of age during the Great Depression saw the better times, the people most affected now are the young adults and people who are coming to retirement who’s pensions are decimated due to performance, in either case the odds are more for you than against, for the young they will work their way out of it (someday!) for the older people (assumption that you are mortgage free at this point) you don’t have the outgoings that the young have and that’s a big advantage. Beating the recession also involves taking a long hard look at how you live and adjusting various aspects accordingly so that you operate more efficiently, if you were to look at your lifestyle as a business would you find ways of doing things better, faster, or at lesser expense?
The way to take advantage of a recession is to use it to create outbound advantages, in the example of the stock market – prices are so low right now that there is value everywhere, the hard part is finding good shares that will bounce back rather than what may look like ‘value’ but the company goes bang or stays long term depressed. That is always a struggle but you can rest assured that there will be some serious winners when we see an upturn! Property is a tougher call, we feel that we are not at the bottom yet and that investment purchases right now are premature, however, while values overshoot on the way up they do so on the way down as well and that means that there will be money made by the smart investor.