As we enter summer and find ourselves halfway through 2020, as a nation we are in rough seas, with no smooth water in sight. From COVID-19 and the ensuing economic crisis to the civil unrest crying for an end to racism, these are difficult times. Though 2020 has been unique in its own right, these are not the first difficult times we have faced. I have found myself reflecting back lately on the last major trial that our nation faced, the Great Recession of 2007-2009. What lessons did we learn back then that may be able to help us today?
There Are No “Sure” Things
Benjamin Franklin is attributed with saying, “In this world, nothing can be said to be certain except death and taxes.” This feels truer today than it ever has before. Last year at this time, would you have imagined that the government would ever completely shut down the economy? Could you have imagined the American people obediently (for the most part) isolating themselves from friends, family, and recreation?
The Great Recession prepared us well for these surprises. Prior to 2007, housing was considered one of the safest investments around. It seemed that houses always went up in value. Isn’t that why mortgages are called “good debt”? When the housing bubble burst, we all quickly learned that there is no such thing as a “sure” thing.
It is important to remember that lesson today. What do you currently consider a “sure” thing? It could be government assistance, your health, your job, any number of things. No matter how sure those things feel, it is important to think through the effects if they were to fail. For financial matters, one of the best ways to prepare for that is through diversification. If you diversify your investment accounts, types of investments, assets, even income streams, then you will be in a much better position if one of those “sure” things fails.
Debt Handcuffs You
Another thing that we saw with the last recession was the effect of debt on personal finances and the ability for a person to adapt and adjust to the economic climate. Many people overextended themselves on their mortgages and it had already become commonplace to live paycheck-to-paycheck and depend on credit cards. In 2007, most everyone’s debt caught up with them. Those with unaffordable mortgages lost their homes and their ability to get credit. Others with debt went into default after becoming unemployed. Even those who kept their jobs and houses lacked the financial flexibility to be able to adapt because they were bound by debt payments.
This lesson is cropping up again today as people are being laid off, furloughed, and having their pay cut. When all of your income is already promised to debtors, it is hard to manage even a 10% loss of income. Those that learned from the last recession are the ones who will weather this current economic crisis better. Minimizing or eliminating debt allows you great flexibility in your financial life and better enables you to adapt to whatever life throws your way.
Your Time Horizon Matters
The last recession affected people very differently. Some people were preparing to retire and suddenly found themselves without the means to do so because their nest egg was so greatly diminished. Others, however, were just starting out as adults and not only found great deals on houses but began investing at the bottom of a market that went up for 11 straight years.
Clearly, your time horizon matters. Where you are in the cycle of life will determine how the economic environment affects you. Unfortunately, most conventional wisdom and financial gurus paint everything with a broad brush as if the same advice is equally appropriate for 25-year-olds and 65-year-olds. It is not. That is why it is important to have a personalized plan for your finances that takes into account your own specific time horizon.
You Need To Pay Attention
Most people have very low awareness of their finances, especially investments. The average worker signs up for their 401(k) plan or is automatically enrolled and cannot tell you 5 years later how much money is in their account or how it is invested. When the economy is doing well, this often goes unnoticed and does not cause problems. When something like 2007 hits, though, the problems become blatantly obvious. So, many people who had operated by a “set it and forget it” approach found themselves at retirement age with nothing to retire on. I think of the poor Enron employees who blindly trusted their company only to simultaneously lose their income and their savings when everything went up in smoke.
If there is only one lesson that you take away from the last recession, let this be it: You need to pay attention to your finances. You need to be aware and intentional if you want to achieve your goals. You should know how your savings are invested, why they are invested that way, and be keenly aware of the risks involved as well.
The good news is that it’s not too late to learn this lesson and let it shape your future. You can start today. At CTA Wealth Advisors, we help our clients be intentional by making a personalized plan for their money designed to achieve their own specific goals. If you want to start being strategic with your finances, call us at 818-841-1746 or email firstname.lastname@example.org to schedule a complimentary consultation. Also, if you know someone else who could benefit from professional guidance, please introduce them to us so they can experience the difference a customized financial plan can make!
Cameron Thornton is founder, president, and CEO at CTA Wealth Advisors, a fee-only Registered Investment Advisory firm in Burbank, California. Cameron has been a financial advisor for 38 years after a career in the United States Navy and as a manager with the Lockheed California Company. Cameron graduated from the University of Southern California with a bachelor’s degree in psychology and earned an MBA from the University of La Verne. He is also a Certified Financial Planner™ (CFP®) practitioner. He wrote the novel What Matters with Rod Zeeb as a result of his passion for helping people secure multi-generational wealth and unity for their families. Outside of work, Cam gives of his time, talent, and treasure to Mater Dolorosa Passionist Retreat Center, where he is Chairman of their Development Task Force. Cam and his wife, Jane, are currently parishioners at St. Bede the Venerable Church in La Canada. They have a life-long history of serving in numerous areas of parish ministry since their marriage in 1978. In his free time, Cam enjoys reading, traveling, and improving his golf game with Jane. They live in Glendale, California, and have three adult children, who also reside in Southern California. In 2019, Cam and Jane were blessed to become grandparents when two beautiful grandsons were welcomed into the Thornton family! Learn more about Cameron by connecting with him on LinkedIn.
1. A diversified portfolio does not assure a profit or protect against loss in a declining market.
2. Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty.