As Warren Buffett famously said once, the first rule of investing is never to lose money. And the second rule is always to remember the first rule.
Now obviously that’s easier said than done. There is no such thing as risk-free asset, just as there is no such thing as a risk-free action. Just walking outside your front door puts you at risk of death by heart attack, car accident, or falling trees.
But everyone understands risk, and all people have levels of risk they’re willing to accept. For some people that risk is greater than others.
Perhaps you know someone who loves to gamble, and is willing to take the risk of big losses in order to reap potentially big rewards. Or maybe you know someone who is so risk-averse that they keep all their money stuffed under a mattress because they don’t trust the banking system.
Most people today probably fall somewhere in the middle. And our appetite for risk aversion versus risk acceptance may change from day to day depending on a number of different factors.
When times are good, we may be willing to accept more risk. And when times are bad, we may be willing to accept less risk.
Today, fears of recession are growing, and as a result, many Americans are starting to worry once again about how to protect their finances against loss. For those who remember the losses of 2008, when markets lost over 50% of their value, those fears may be great indeed.
Can you afford to lose 50% or more of your savings during the next recession?
How Much Time Do You Have?
For someone with 20-30 years or more left to save, major losses may be catastrophic but not fatal to your finances. After all, you can recoup those losses in the future once markets recuperate.
But if you only have 5-10 years left to save before retirement, losses of 50% or more could absolutely destroy your dreams of retirement if you don’t have enough time to recover from those losses.
Looking back at previous recessions and financial crises, how long did it take for markets to finally recover?
There are two ways of looking at recovery. The first is to look at how long it took markets to regain their pre-crash peaks after the market crash. The second is to look at how long it took markets to return to an inflation-adjusted pre-crash peak.
After all, inflation continues to occur even during a crash and recovery, so a market index at 15,000 one year and the same index at 15,000 six years later isn’t the same. Assuming an inflation rate of 2%, that index should be at 16,892 six years later in order to keep pace with inflation.
So an index that drops from 15,000 to 10,000 and back to 15,000 within six years hasn’t actually recovered, it has lost value to inflation. Now that we have explained that, how long has it really taken markets to recover after the last few crises?
A Look Back at 2008
Let’s look at the Dow Jones Industrial Average (DJIA) which peaked at 14,164.53 points on October 9, 2007. From there it took a slow ride downward, picking up in late 2008 before hitting its nadir on March 9, 2009 at 6,547.05 points.
The Dow didn’t break above that 2007 level until March 5, 2013, when it closed at 14,253.77 points. That’s five years and five months, a pretty long time for recovery.
But adjusted for inflation, the Dow should have been 15,780.53 points. In fact, it wasn’t until November 2013 when the Dow finally broke 15,800 points, closing on November 13, 2013 at 15,821.63, a date when the October 2007 high would have been equivalent to 15,800.59 points.
So it took an extra eight months to really recover, or a total of six years and one month before the previous October 2007 high had been beaten.
The Dotcom Bubble
The dotcom bubble peaked when the Dow reached 11,722.98 points on January 14, 2000. It didn’t reach that level again until October 3, 2006, when it closed at 11,727.34.
But adjusted for inflation, the January 2000 high would have been 14,014.79. Yikes!
So when did the Dow finally recover from the dotcom bubble collapse?
Believe it or not, it wasn’t until December 20, 2013, when the Dow closed at 16,221.14, when the January 2000 high would have been equivalent to 16,185.00. So not only did it take far longer for the dotcom bubble to recover (almost 14 years), it also didn’t recover until after the 2008 bubble had already recovered.
That means that for the entire period of nearly 14 years from January 2000 to December 2013, the Dow had not reached its dotcom bubble levels. Talk about a lost decade.
Lessons to Be Learned
The takeaway from looking at these numbers is that it can take a long time for asset values to recover after a bubble bursts. And with the current bubble being particularly large, when it bursts it could easily take years for markets to recover, especially when accounting for inflation.
If you’re early in your career and have decades ahead of you, you could weather a downturn even if you take large losses. But if you’re nearing retirement and relying on your nest egg to fund your lifestyle after you retire, you may not be able to afford to take huge losses.
That’s why many people today are looking to safe haven assets to safeguard what they already have, in the hope of protecting themselves against future loss. And one way they’re doing that is by buying gold and silver.
Gold and silver have served as safe haven assets for centuries, and they continue to be in demand when the economy is threatened with recession. Gold set a new all-time high price late last year thanks to safe haven buying, and many analysts expect gold’s price growth to continue this year, particularly if the economy continues to show signs of weakening.
One benefit of gold and silver is that they can be purchased with a gold IRA or silver IRA, which allow you to own physical gold and silver while still enjoying all the same tax advantages of an IRA account. You can even fund a gold IRA or silver IRA with a tax-free rollover from a 401(k), 403(b), TSP, IRA, or similar retirement account, allowing you to safeguard your retirement savings without suffering a tax hit.
If you’re looking nervously at developments in the economy and wondering how to minimize your exposure to markets, maybe it’s time to look at gold and silver. With over $2 billion in precious metals placements and over 5,000 5-star reviews, Goldco has helped thousands of customers buy gold and silver, many of those with a gold IRA or silver IRA.
Don’t let your hard-earned savings lose value because you didn’t take steps to protect them. Call Goldco today to learn more about how you can benefit from gold and silver.
Trevor Gerszt is the founder and CEO of Goldco, a precious metals dealer in Los Angeles. For more than 20 years, Trevor has sought out ways to help people build long-term wealth through the security and stability of precious metals and other alternative assets. Goldco is A+ Rated by the Better Business Bureau, a 5-Time INC 500 Winner and has countless 5-Star Reviews for its quality customer service, dependability and strong reputation.
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