I’m a Wall Street Journal junkie. When I first subscribed, 25 years ago, I was totally intimidated. But I’d lay it on the kitchen counter and every day I’d pass by it figuring, by osmosis, I’d pick something up. I credit that ritual for greatly reducing my fear of investing.
The Journal is always filled with interesting and instructive articles. Last week, for example, I was riveted by the headline Personal Finance Lessons We Can All learn From a Pandemic Year.
“With 2020 in the rearview mirror,” the article began, “there’s a lot of economic damage to be assessed. But there are a lot of personal finance lessons we can learn—lessons that will put us in good stead whatever the economic future holds.”
There were 15 excellent lessons. Let me share my 5 favorites.
1. Emergencies Do Happen. 2020 showed us the importance of having an emergency fund of at least a month’s expenses, preferably more. Those who had adequate savings were spared from making painful cuts in spending or borrowing at high interest rates when facing temporary setbacks.
2. Buy When Others Are Scared. As Warren Buffet once said “Be fearful when others are greedy and greedy when others are fearful.” Though it’s definitely counterintuitive, buying when the market is falling increases your chances of earning above average returns when it bounces back.
3. Manage Your Risks. Everyone needs to ask themselves some difficult questions. Does my family have proper health care or disability coverage? Do we have enough to cover high deductibles? Do we have sufficient life insurance if the family income earners die?
4. Have A Three-Bucket Strategy. The 3 Bucket Plan includes: (1) a short-term bucket in cash to cover 1-2 years of expenses; (2) an intermediate bucket in core bond funds to cover 2-5 years of expenses; (3) a long-term bucket in equities for money not needed for at least 5 years.
5. Stay Invested. During the first quarter of 2020, stocks plunged. Investors panicked. Many jumped ship. Most thought a recovery was dependent on a vaccine. Yet by year’s end, stocks surged to record levels. The lesson: it’s pointless to try and predict the market. Instead, refer to lesson #2.
What financial lessons did you learn in 2020? Let me know in a comment below.