Recently I was opening my mail and got a statement from one of my financial companies. I opened the envelope and inside was a recent account statement. Then I read the statement.
My jaw dropped. My eyes were in disbelief.
At this point I was going to need a new set of eyes and a pacemaker to kick my heart back into rhythm again. I had lost over a third of my money in my investment accounts.
Has this happened to you yet?
Maybe it was your 401k, IRA, or your kids college 529 plan. In any case, they probably all lost money in the last year with the market hitting twelve-year lows.
At this point, many of you may find it kind of hard to just grin and bear it and keep saving up money. I know how you feel. So the real question is how do you save up money in a bad economy?
Where Are You Saving You Money
If your like most people you don’t save your money all in the same place. You might have some in non secure assets like a 401k, IRA, mutual funds, or college savings plans for your kids.
Then you may also may have some in more secure assets like savings and checking, certificate of deposits, and even online savings accounts.
The point here is that we all save money in a variety of places. But one thing I see very common in people who invest in the market is when they see the economy tank, they tend to pull their money out and put it into more secure investments, presuambly thinking they won’t lose more money this way.
I know what your thinking: why would I leave my money in a place where it is constantly shrinking? The truth is we tend to look at the short term view when it comes to investing in the market and not the long term and this is the approach you need to take when saving up money in a bad economy.
The fact is it’s actually healthy for the market to take a dive every now and again. Think about it. If the market always continually went up you would always be paying more and more for your investments. A good example would be if gas prices would continually go up and never come back down.
Yikes!
Another example is the current 2008 to 2009 economic crisis; the price of most investment sure aren’t gaining much but they are a lot cheaper. In fact, if you are under the age of 40 you are facing a huge opportunity right now.
Yup, because the prices on most investments like stocks and mutual funds have dropped so much that the best thing you could do for yourself right now is buy like crazy.
So what do you do if your older than 40?
That’s a great question. If your older than 40 and you are having a tough time dealing with this economy you may want to reconsider your risk tolerance.
What Is Your Risk Tolerance
Risk tolerance is nothing more than the amount of risk you’re willing to take in the market. They range from aggressive to conservative.
The aggressive end typically invest in more volatile companies like the ‘next Microsoft’. They are your smaller companies with less capital, usually less that 1 billion.
Then their are your more conservative portfolios which invest more into larger companies like Walmart, IBM, and Microsoft. These companies are usually less volatile and have a lot more capital, say 5 billion or more.
The point here is if your not comfortable with the risk you are taking or don’t realize some of the risk you are taking, you may want to reconsider your options.
A good example of this is when a friend of mines client moved their money into a mutual fund. Now this particular individual thought it would be OK to invest into the market and take some bigger risk, I mean after all it can’t be that bad or at least they thought.
Then the nightmare started. The client watched the news almost everyday and they would see what the Dow Jones and the S&P going up and down. As a result, they would call their financial planner everyday asking if their investment were OK. After a while, it began to get very irritating and finally decided it would be best if he would assign the client to a different representative.
So the moral of the story is always know how much risk you can handle. When I was in financial services, I always prepared my client for the worst and hoped for the best but I always made sure they could handle the risk involved.
Are You Prepared For A Bad Economy
Most people aren’t prepared for a bad economy. If their is one thing you remember form this article it’s that the market will go up and it will go down. In fact, statistically speaking, an average bull market last anywhere form 18 months to 3 years.
However, you should know that a recession can last a long time as well. If you aren’t prepared, take time now to put a plan in place so you will be ready for the next down swing.
Call your financial professional if you have one, start saving an emergency fund, and last but not least cut down on frivolous spending. This is your best bet to survive a bad economy.
Share Your Story
If you have a story to share about this bad economy, feel free to leave a comment and let us know what you did and how you will go about fixing your situation.
Till then,
Chris
This post was recently featured in the Money Hacks Carnival by Good Financial Cents.