Financial Stress During a Crisis – 5 Lessons Learned
Financial Stress During a Crisis – 5 Lessons Learned
I still vividly remember eating lunch with my friends (Ben and Brad) back in 2009 when the markets were sinking on a daily basis.
We had a weekly routine of loading up on a generous helping of soul food at The Kitchen Restaurant here in Monroe, LA.
One Tuesday, Ben and I were already eating when Brad, the financial advisor, walked in. He looked like he’d seen a ghost but I honestly didn’t know why.
You see, I had just started investing only two years prior with index Vanguard funds via our practice’s retirement account. I didn’t realize it at the time just how bad of shape the market was in and how many people were losing a majority of their retirement assets.
Fast forward to today. Things have changed. I, like many of you, have suffered serious financial setbacks but I know that we will pull through, we’re resilient!
If you go back in history, you’ll find that this isn’t the first time we’ve faced a crisis causing financial stress….and it certainly won’t be the last.
It’s for this reason that I’ve been a Dave Ramsey follower who, as you know, preaches establishing an emergency fund first before we begin getting out of debt or saving.
If you don’t have an emergency fund now, or have one but it’s not too big, consider focusing everything you can to build one after a financial crisis so you’ll be better prepared in the future.
Dave recommends having 3-6 months of expenses saved in an emergency fund. I, being a bit more cautious, recommend going out to 12 months or longer if possible.Join the Passive Investors Circle
Markets Don’t Like Uncertainty
As of this writing, we’re in the middle of one of the biggest financial crisis the world has ever faced – the Coronavirus (COVID-19).
As our leaders are trying their best to contain it, the ripple effects from the disease are causing significant impact on the financial markets.
I’m not a financial planner/advisor but I do know that the markets don’t like uncertainty. As this is a situation that we’ve never faced before, there is MUCH uncertainty out there.
Depending on when you’re reading this article, (in the midst of the Coronavirus crisis, at the end of it or well past it), you can start to take a look back to see how people began to react to the news when it first came out.
As a country, it seems that we went from claiming that China was having a disease outbreak to, hey, maybe this virus could possibly make its way to the U.S. to wham!, let’s start shutting down the country because this is the REAL DEAL.
During times like these, people slow their spending (except to buy up cases of toilet paper?) and companies usually slow down their operations.
Most states, including mine in Louisiana, informed medical/dental practices that they were to shut down and see patients only on an “emergency-needed” basis. No elective procedures were allowed to be performed.
But these were NOT “normal” shock-induced economic slow times. I think when you take everything into effect plus adding in the government imposed bans on travel and large gatherings (which was a smart thing to do) then there’s no possible way to avoid the economy coming to a screeching halt.
One of my good friends, Dr. Brian Evans, informed me of a very sharp 94-year old dentist he knows that told him he’s seen a lot happen over his lifetime but NOTHING like this.
This especially hit my oldest son hard as we were planning on going to see his favorite sports team, the Dallas Mavericks, for his birthday in March.
The announcement that the NBA season was put on hold happened only days before our game.
It floored him but it made me realize that something bad was getting ready to happen if we were cancelling sports this soon.
Because pro sports, as you’re aware, are a HUGE money maker for the U.S.
Let’s get into some lessons that we can learn on dealing with financial stress whenever we’re faced with a financial crisis.
Coping With Financial Stress During a Crisis – 5 Lessons Learned
1) This won’t be the last one…
I realize I’ve already mentioned this but I think it’s worth repeating especially for the younger people reading this.
This can’t be overemphasized as a crisis tends to shock us as the definition of a crisis is: “a time of intense difficulty, trouble or danger”.
As someone that routinely sedates patients, I know that a crisis can occur at anytime. It doesn’t matter how healthy the person is and if you do everything by the book, bad things can still happen.
Whenever we face a new crisis, it makes us ask ourselves, “How could something like this happen?”
2) There’s NO perfect reaction
I don’t think there’s a perfect reaction, only either an under-reaction or overreaction.
When faced with uncertainty, the best time to respond is as soon as you notice things are starting to deteriorate.
But time spent imagining a perfect reaction to a crisis is simply time wasted.
3) Every crisis exposes oversights
Basically a crisis shows us what we were NOT prepared for. If I sedate someone and they start to have trouble breathing then NOT having oxygen on hand is going to start a major crisis.
Regarding a financial crisis, you can gain much value in identifying how you could have realistically handled it better this time, so you can handle it better next time.
Remember, there will be a next time.
For most of us that means discovering how well we acted on advice that all of us have heard before yet too many of us ignore…have an emergency account LARGER than you feel you need.
As previously stated, I feel that 6-12 months (probably more) of income in an easily accessible account is a must.
4) Every crisis presents opportunities
What happens when a financial crisis strikes and causes the stock market to go into a major decline?
The sky is falling…sell…sell…sell!!
With the COVID-19 crisis, financial stress could be seen as money began flowing out of stock funds at a record pace. In just over a week, the market went from near 30,000 to sub-20,000.
What this means is that record numbers of owners of those funds who were unprepared to ride out a sudden shock sold their devalued shares (they went on sale!) to a buyer who was ready, willing and able to buy them.
This reminds me of a quote from Warren Buffet about fear:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
5) Every crisis rewards those prepared
You’ve heard it time and again. Those that are prepared and purposeful are the ones that are rewarded during a crisis.
Can you guess what the common denominator of those ready and able to take advantage of those opportunities arising from a financial crisis?
I’ll give you a hint…..take a look at the name of this website.
Debt. That’s right, debt. The common denominator that these folks have are:
- low levels of debt and…
- big piles of cash ready to deploy when the masses are selling
Look at what happened during the real estate crash in 2008-9. Those savvy and prepared real estate investors took advantage of all of the foreclosures and bought when properties went on a major sale.
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Speaking of financial crisis, remember the Great Depression? You may have heard that more millionaires were made during the Depression than any other.
I’d like to make a prediction (and I’m going to put it in writing to see if I’m right and hopefully I am).
My prediction is that 2020 will surpass the Great Depression on the number of millionaires made.
Here’s a bit of information I found on this subject from Quora:
“Not everyone suffered during the Great Depression. More people became millionaires during this time than in any other time in American history. Opportunities, that were not present during the 1920’s economic boom times, suddenly became available. An economic downturn is a good time to start a business. Start-up costs are much lower in a recession than in boom periods. Savvy entrepreneurs edged in and positioned themselves for when the economic climate improved.
Many poorly run businesses closed during the Depression years and their equipment and assets could be bought at fireside sales for next to nothing. Commercial rents were cheap and wages were low. There was also time to get the business fundamentals right before increased orders made it too hectic for the entrepreneur to build and test his business model.
It was these ‘if you can dream it, you can do it’ Great Depression entrepreneurs that made the best of the crisis to provide a service, or product, for new markets.”
“Who were some of these maverick entrepreneurs? Some very famous names made their money during the Depression era.
In Kentucky, a grandfather, called Colonel Sanders, started serving fried chicken at his gas station. By 1937 he had expended to a 142 seat restaurant due to popular demand. Two young electrical engineering graduates stared a electrical machine business in a rented garage during the 1930s. Bill Hewlett and Dave Packard officially became business partners in 1939 with only $538 in investment money.”
“Many people with small amounts of liquid cash were able to buy bankrupt businesses at bargain prices. Towards the end of the 1930s some business people watched the upsurge in military spending by some countries. The world was preparing for war and those that invested in companies that made in-demand products for the government stood to make lots of money.
Companies dealing with shipping, military vehicles, textiles (for uniforms, tents, etc.), metals (copper, steel, aluminum and iron), shipping and petroleum products made a fortune. Well known companies that were bought at this time were John Deere, Reynolds Metals and Douglas Aircraft.”
“Another huge opportunity was real estate. During the Depression years, demand was low and thus prices were low as well. Visionary business people knew that real estate values would go up in the future and when they did they used the equity to leverage their business growth and expansions. Those wise folk that were not caught up in the stock market frenzy in the 1920s, and saved their cash, were well positioned to snap up bargain businesses and became millionaires as a result.’
If you’re in the middle of a crisis dealing with financial stress then it’s too late to prepare for the crisis.
If you have downtime (like most of us have now) take it upon yourself preparing for the next one.
Remember, it’s not how hard you hit, it’s how hard you get it and keep moving forward.