This is an archived article that was published on sltrib.com in 2012, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
Salt Lake consultant Sean Lee, president and founder of SPL Financial, Inc, says while the economy is showing signs of improvement, says investors should be aware of recession lessons.
What are some financial lessons from the Great Recession?
There are many lessons that we have learned, but perhaps the most important is to be cautious with your money and make sure you invest according to your risk tolerance. Prior to the recession, many individuals threw caution to the wind when it came to investing their life savings, all in an attempt to get a sizeable rate of return. The problem is, as we've all learned, that high rate of return typically comes with significant risk. That's why it's so important to protect and preserve what you cannot afford to lose and risk only what you can.
How can investors be both cautious and flexible?
Investors need to be involved in their investment strategy and understand where their money is, what it's doing and how it's working to meet their financial objectives. This way, they are in a better position to determine if their investments are continuing to work for them. When their investments aren't meeting their objectives, they need to be flexible and make a change. Having an investment plan to follow is important, but being nimble and changing that plan when the market becomes volatile or unpredictable is key to finding success with your money.
Describe some investment strategies.
Investors should keep in mind to help alleviate the pain of market swings is diversification. Diversification is a risk management strategy where a portfolio is made up of several different types of different investments. This may include stocks, bonds, mutual funds, insurance products, commodities, real estate and more. This way, in the event the market experiences a significant fluctuation, no single investment can have a devastating impact on the overall value of the portfolio. Also, by integrating non-correlated investment strategies and products, such as the insurance product fixed annuities, you can prevent having too much money tied directly to the performance of the market. This financial product in particular has gained in popularity for retirees since the start of the recession, as they provide some security when planning for and structuring an income for retirement.
What do you see for the immediate future?
With this ongoing market volatility, investors should move forward cautiously. While the economy appears to be on an upswing, there is no guarantee we're on a straight path. Our economy is still very fragile, and anything can happen. The volatility of gasoline prices poses a threat to both inflation and economic growth two of the key economic indicators that help us determine if the country is really getting ahead, or at risk of falling behind. Europe's economy and the fact that it's an election year will both impact our economy as well. Be sure you take to heart the lessons learned from the last recession, and while we hope for the best, be sure to prepare for the worst and protect your pocketbook from history potentially repeating itself. Positive economic reports that are released one week can be erased by negative ones the next, and your investments should not pay the price for bad news. Developing an effective investment strategy that guards against stock market volatility and other negative economic factors can help protect you from losing too much money, like some people did during the Great Recession. Learning from the past, and applying the recession lessons to an investment strategy can help you to better plan for and prepare for the future. Many people have a short-term memory, and tend to repeat many of the same mistakes. Even though we always hope for the best, the lessons learned from the last recession should prepare you for the worst and protect your pocketbook from history potentially repeating itself again in the future.
Dawn House Sean Lee, consultant.