My lessons from the crisis of 2008

“Those who cannot remember the past are condemned to repeat it.”
George Santayana, Spanish philosopher

I have just finished reading my gift from Father Christmas, “The Ascent of Money: A Financial History of the World”. This is the newly released book by renowned British historian Niall Ferguson.

2008 was not a first. In the past three or four centuries global economic crises have happened before. They will probably happen again – and maybe even again in your lifetime. Certainly there will be many more bubbles created and busted in your lifetime.

What have you learnt about managing money from what you experienced and observed in the past year?

What will you remember and do differently? What will you share with and encourage your children and grandchildren to do?

My Lesson: Margin of Safety

One of my clear lessons from the financial events of the past year is the importance of a margin of safety.

Retire with more than adequate funds

From seeing all of the news reports about recent retirees needing to go back to work I strengthened my resolve to not cut it that close. Yes that means saving earlier and possibly harder -but more importantly it means creating wealth smarter.

Contain debt repayment obligations

When one borrows to the maximum capacity of both theirs and their partners existing income there is no margin of safety if that combined income decreases, as it often does through life. When you are at maximum capacity you can’t afford extra repayments, so if you miss one you are in default and on the lender’s radar.

Have a backup tank

When things go awry you need access to liquid assets that can be accessed within days at the most. This can be actual cash in a bank or access to redraw on your mortgage.

Shares and managed funds are often considered to be liquid assets. But, as we saw this year redemptions/sales can be frozen and the emergency may have you selling precisely at the wrong time.

Spending less than you earn is another excellent way to have a backup tank. If your income drops temporarily you are ok as you are accustomed to living on less.

Leverage conservatively

Using other people’s money can accelerate your gains, but this year we saw the truth of how it also accelerates loses. In a boom it can be tempting to maximise your leverage because “you don’t want to miss out”.

However, you must always respect the power of the beast and not underestimate the probability or magnitude of loss. History shows it is this underestimation coupled with leverage that can cause the previously unimaginable catastrophe.

Leveraging conservatively will mean different things depending on your overall circumstances. Work out your margin of safety.

Your Lessons

What have you learnt about managing money from what you experienced and observed in the past year?

Please help us all learn from our collective past by sharing your lessons as a comment below.