The recession of 2008 to 2010 caught a lot of people off guard. Up to then, many investors simply assumed that things like real estate and stocks would keep going up forever. After the bubble burst, many people gave up on investing as if they assumed the markets would go down forever. It’s obvious both camps were wrong. You can be a smart investor by learning from the mistakes of extreme optimists and extreme pessimists. A number of experts have suggestions for investing after the recession.
Aim for lower growth. John Bogle, founder of Vanguard mutual funds, suggests that wise investors will accept that the economy may grow at about 2 percent a year for a while. This is lower than the historical average of 3 percent. He says it’s not reasonable to expect companies to grow faster than the economy. People who buy stocks will have to settle for lower returns than people were getting before the recession. In practical terms, this means to adopt an investing strategy of finding stable companies with steady growth. If the recession taught anything, it’s that high flyers with astronomical growth can tumble quickly and take your money down with them.
Diversify. If investors put their money in a variety of investments, they put themselves in a position to take advantage of any sector that recovers first. According to ConsumerReports.org, if you invest in stocks of both large and small companies as well as bonds, and keep some money safe as cash in the bank, you’ll be ready for whatever comes. This is a much more conservative way to invest than was popular before the recession, but the excesses of that time have taught investors that caution is wise.
Consider smaller companies. Historically, stocks of small companies have led the way in a recovery after the recession. Consumer Reports says that stocks of small companies suffered the most in the recession, losing 60 percent of their value. Going forward, though, if small caps repeat the lessons from past recessions, they will be the first to bounce back. Stocks of large companies tend to flourish after small caps have led the way.
Pay attention. You’ll be a smarter investor if you watch your portfolio, pay attention to the news and make decisions based on facts rather than hope. The period just before the recession was one of “irrational exuberance” as Alan Greenspan put it in 1996. His phrase was an accurate description of the period just before the 2008 recession. Don’t expect things to go up indefinitely, pay attention to signs of trouble and only invest when you understand why you expect your investment to do better. In other words, keep it real and stick to the facts.
- One of the myths investors fall prey to is that a recovery is inevitable. Much like the old wive’s tale that says lightening can’t strike in the same place twice, the idea that you can’t have two recessions in a row is simply not based on reality. Never assume investments have to go up.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.