Vol. 3, Issue 2July 2011


Coping with the Financial Crisis

The first round of the financial crisis left your portfolio in ruins, and you are not sure when – or if – you will ever recover. What are your options?

You can curse and scream and despair, of course. And you probably have already done those things. But then you have to look at your realistic options.

First, assess where you stand. Look at the total value of your portfolio. It might be instructive to compare your losses to the general market losses. Did you do better or worse than average? If you did better, what did you do that worked? If you did worse, what mistakes did you make?

One of the most common mistakes was panicking. When stocks began to plummet, a lot of people pulled all their money from stocks and put it into cash. And a lot of that money stayed in cash through all or much of the market recovery thus far. There are lots of good reasons for not being in the stock market, but a knee-jerk reaction to a volatile market probably is not one of them.

However, you should take another look at how you feel about risk. You might still feel the same, but you might not. The financial crisis was a good lesson in the difference between theoretical losses and actual losses. A lot of people discovered that their tolerance for risk was not as great as they thought it was. If you were one of these people, evaluate your reaction and try to determine a more comfortable approach to risk.

Next, look at where you need to go. You have less time to save for things like retirement than you had when the crisis began. At the same time, you might have to adjust to some new financial realities. Perhaps you have not had the salary increases you expected. Maybe you even have lost your job and had to find another, lower-paying job. Or maybe you have been providing financial assistance to children or other family members.

So, realistically speaking, how much can you put aside to invest? Again, be realistic. Look at your monthly expenses, then look for ways to cut them. Can you refinance your home? Can you spend less on entertainment or travel? Should you look into a college loan to cover some of your child’s tuition expenses? Come up with an idea of how much you can invest.

And how far toward your goals will investing that amount at a risk level with which you are comfortable get you? You might find that you are short – maybe far short – of where you expected to be. If that is the case, it is time for some tough decisions.

If your goal is retirement, for example, do you need to downsize your retirement goals and expectations? Do you need to work longer? Might you be comfortable taking on a little more risk? Are there additional ways you could cut your expenses to free up more for investing?

The important thing is to keep moving forward. The financial crisis was the most significant since the Great Depression. But like the Great Depression, it will end.