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Lessons re-learned in 2009

Lessons re-learned in 2009

Always have an emergency fund. A stash of cash (or liquid investments) that will cover three to six months of expenses is absolutely essential, despite the low returns and tax inefficiency of cash holdings.

  1. Live within your means. If there is a golden rule in personal finance, this is it — spend less than you earn. Unfortunately, many had forgotten this basic principle and suffered as a result. In fact, some economists claim that profligate spending was largely responsible for the economic recession in the US.
  2. Always have an emergency fund. A stash of cash (or liquid investments) that will cover three to six months of expenses is absolutely essential, despite the low returns and tax inefficiency of cash holdings. You don’t get advance notice for emergencies, so it’s important to be prepared.
  3. A home is not an investment portfolio. With home prices trending upward year after year, many investors fell into the trap of thinking that their home was an investment which could be used to fund retirement. Homes are not immune to price corrections, so it is best to think of them as a place to live in; any price appreciation is a bonus.
  4. Bonds have an important place in a portfolio. As unappealing as bonds are in bull markets, they shine when stocks drive off a cliff. First, bonds cushion the fall of stocks in a portfolio. Second, they enable an investor to take advantage of low stock prices through rebalancing.
  5. As Benjamin Graham put it: “The investor may as well resign himself in advance to the probability rather than the mere possibility that most of his holdings will advance, say, 50% from their low point and decline the equivalent one-third from their high point at various periods in the next five years.” Yet, investors are taken aback by volatility.
  6. Use leverage responsibly. Leverage is unavoidable in certain cases such as buying a home or getting an education, but it must be approached with caution. Just because interest rates are low, it is no reason to take on a loan if you don’t need it.