Revisiting the Great Recession: Part 6 "No Guarantees"

By Gary Silverman, CFP®

Last week we began looking at lessons you, the individual investor, could have learned from the Financial Crisis. The first lesson: You won’t see it coming in a way that allows you to win.

Now quite a few of you don’t believe me on that one. Fine. I can live with that. Let’s try another one this week: Guarantees. A lot of people think that some things are guaranteed. They may not use the word “guarantee,” but they still believe some things can NEVER happen or that some things will DEFINITELY happen IF certain other things happen. The problem is, folks think they can predict “if X then Y.”

Well, the financial crisis taught a whole lot of people the fallacy of some of those types of thoughts. Of course, in hindsight they will not admit they thought them. Confused? Let’s look at some examples.

“General Motors is a blue-chip company and can’t go bankrupt. If they got into that big of a mess the government will bail them out.” (Guess again.)

“Even if they go bankrupt, their bonds will be safe.” (Unless they have no value, or the government arm-twists the major bondholders to give up their rights.)

“Real estate is a safe investment.  It only goes up in value. The only variable is how fast.” (Anyone still think that?)

“Company X and industry Y pay great dividends that haven’t gone down in my lifetime. Even if the market goes down, I’ll get that income.” (Unless the bottom falls out of banking, insurance, real estate and then the whole economy and they halt those payments.)

“If the sky starts falling, I’ll be able to get out before taking too big of a hit.” (I wonder how many bankruptcies happened to people who thought that.)

“The mortgage has a balloon payment in three years, but I’m not worried, as I’ll be able to refinance then.” (Unless no one is loaning money at that time.)

“The stock market returns 10% a year.” (Actually, that last one is true. On average, if you look at multiple decade periods. But a single 10-year stretch can result in a zero-percent return or worse. Not good if that’s when you’re trying to retire...)

The bottom line of all of this is that what you think is a sure thing might not be all that sure if circumstances misalign at the wrong time. And even if things get back to “normal” you might not have survived the interim.

Lesson: Stuff happens even when you just know it won’t.

Corollary: Stuff won’t happen even when you know it should.

More next week.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing