The year 2008 will take its place in history as one of the worst years for investing. The credit crunch and recession that began in 2007 sent investors flying out of the market and back into fixed income investments as a way to protect against loss. With 2008 in the rear view mirror and 2009 in our sights, it’s time to take what we learned last year and profit on our wisdom in 2009.
Bubbles don’t make good investments
2007 and 2008 were the years the bubbles popped – and so did the value of sustainable and profitable corporations. Leading up to the 2008 Wall Street collapse were many different bubbles, which occurred first in real estate and next in the commodities markets—namely oil and building materials. Throughout the real estate boom that began as soon as FED rates hit 1% in 2002, the media and investors were caught up in a buying spree. Ordinary families and investors were piling money into funds and second, third, and even fourth homes trying to profit from exploding prices for then in-demand homes. While there were many people who amassed fortunes in the real estate bubble, many more bought in as the market collapsed and were left with nothing more than past due mortgage bills. Leave the bubbles for the speculators and put your important retirement funds in investments that have performed the best and also the most consistently—index funds.
Asset allocation is most important
Asset allocation will long remain the most important part to managing a proper retirement portfolio. As the world’s stock markets began to descend, many investors found themselves between a rock and a hard place after falling short on their retirement goals and plans. When thinking about retirement, it is most important to invest in the right assets, as defined by the amount of time that is at stake before retirement ultimately comes.
Future retirees work longer for simple mistakes
Many investors learned the hard way that investing for the long term requires more risk, and for the short term, a more conservative portfolio. If you have less than 10 years before retirement, consider moving the bulk, if not all, of your portfolio into safer investments like bonds and CDs, rather than gambling on the stock markets. Fixed income investments carry their name because they are safe and reliable, unlike stocks which do not maintain a steady growth. for those quickly approaching retirement Stocks are meant for the 20 and 30-year olds who have enough time to wade out the yearly ups and downs, while bonds are meant for the nearing retirement crowd.
All investments get hit in a downturn
Take a look at any company’s chart from 2007 through 2008, and chances are that the stock is down more than 20% (the point at which the market is said to be bear). This is a result of basic supply and demand and also the changing perspective of investors to sell off even profitable companies in poor economic times. Though the future earnings potential for many companies did not change during the slowdown, they were still hit with huge capital losses. This change in price generally stems from the way investors value companies; in 2007, investors were willing to pay large PE and PEG premiums to secure good companies, and in 2008, investor sentiment shifted to paying undervalued PE and PEG ratios.
It takes some research to see where the money is
You might know General Electric better for its wide array of stoves, TVs, light bulbs and other appliances, but it was their financial holdings that sent the company down nearly 66% in 2008 alone. It takes a dedicated investor significant research to find out where companies are making the most money, and in the case of GE, it was not in consumer appliances, but in fact in huge holdings of debt by GE Money Bank. Needless to say, investors looked shell shocked when this ancient stock and Dow component took a nosedive.