What did we re-learn in 2008 the hard way
that can help us in 2009 and beyond?

By: Phil Guerrero/PMG Wealth Management,
December 1, 2008

No doubt, 2008 was a tough year for everyone and one most would love to forget. Recessions are not easy to go through and when this one draws comparisons to the Great Depression and the oil crisis of ’73-’74 you know it must be tough for a large portion of the population.

With the perfect storm of a housing bubble, cheap credit, high oil prices, Wall Street’s credit crisis, and the longest campaign for the Presidency, the media and market volatility was all over the place. I can’t remember a time when so many were glued to the TV or internet waiting for the next news piece. So what did we learn and how can we benefit from it? For the last few years we’ve discussed financial planning basics at times and I’m sure you’ve seen other “experts” on TV talking about debt reduction and “the importance to pay yourself first”.

Here are some financial planning basics and thoughts once forgotten that we need to focus on to get “us” (the United States) back on track:

1. Live within your means. Pretty basic, but ranks way at the top of the list for our highly debt ridden society. It is difficult to juggle needs versus wants at times, but for those with debt let’s re-focus on cutting out the extra spending. First step to solve this issue is to create a monthly budget.

2. Pay yourself first to build an emergency fund. Another basic, but coincides with #1. My business owner clients usually do a better job at this, and it’s not because they have more money. They know to prepare for the unexpected as equipment can break down or collections can slow. My employee clients have a tougher time saving based on salaries and payment schedules, but should re-focus here going forward with job security being a main concern for the next year with companies trying to save money.

When I look across my client base, and talk with other advisor friends of mine, it’s staggering to think how better off, we as a country would be if we could only follow rules number one and two above. Wall Street would still have some issues, but the consumer debt of this country and a lot of the housing bubble would have been avoided. I think you’ll see President Obama spend some time on these two issues as he sets the expectations for turning the country around.

3. Housing can go down. Just as any other asset class on the planet it goes through cycles. Popular TV shows such as House Hunters or Flip This House helped build the false impression that housing only goes up. There will be much opportunity with real estate after it bottoms, let’s help remind the next generation to match time horizon to the investment.

4. Diversify your company retirement plan. Enron’s problems back in the early 2000’s will always be the classic example as to why to diversify, but with widely held companies AIG, Fannie Mae, Freddie Mac, and Citigroup having issues in ’08 we should have this one licked going forward.

5. Investing is for the long term where as trading is for the short term. Overall I think we have a good handle here as we practice some of both. I only bring this up since I’ve read a few stories predicting this year may have scared many out of the market for the rest of their lives. No doubt a big mistake long term, but there will be some who never return to the stock market after this year.

6. The United States is still the economic powerhouse of the world. Despite being late to the party, our government leaders possess the ability to make sweeping change and to infuse large amounts of capital to the system. Even though we may be in the worst economic times in our investing lifetime, be thankful you live in the United States. As the saying goes, “when the U.S. gets the sniffles, the rest of the world catches a cold” and right now the rest of the world is hacking up a lung. Look at the U.S. Dollar index that has been surging over the six months. In the worst case scenario we actually look pretty good.

These were just some of the larger issues on my mind this month that I wanted to pass along. There has to be some good that comes from this and getting back to basics is a start that most of us can control.