The sky is falling! At least that is what many are saying these days about our nations struggling economy, rising energy and food prices, and a financial sector in absolute chaos. Whether it be Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, or American International Group to name a few – the past several months have been totally amazing. It is crazy to think that companies that have been around before the great depression are now virtually gone in a matter of a few months. Even the great General Electric fell like a hammer because of liquidity concerns. Several of my friends and co-worker’s are talking about pulling their money out of the market so they can stop the bleeding. My wife kept me up for over 3 hours the other night in a mad frenzy worrying about our money in the bank, 401ks, stocks, and anything financial. I finally calmed her fears and told her it was an opportunity that she and I had never seen in either of our lifetimes. Yes, I said it – a great opportunity! These events that have transpired over the past year or so are the worst since the great depression. That fact right there tells me this is a once in a lifetime opportunity to purchase high quality stocks that will help to build our passive income streams.
Based on this opportunity and the recent events, I decided to go back and review the foundation of our personal finance goals. I believe that in these rough times, it is important to stick to your long range goals. This is no time to panic and abandon your investments. As I told my wife, this is an excellent opportunity that we may never see again. Below are a few key elements that we base our financial goals on.
1. Multiple Income Streams - I am a firm believer in having multiple income streams coming in. This has been stressed over and over on PFI, but each and every day I work at creating new income streams. While my family currently relies mostly off of my income from my day-to-day job, we have a goal to eventually remove this reliance. I also currently use stocks to bring in money from selling covered call options and by receiving dividend payments. The meltdown in the markets will have a direct impact on these two income streams. Both of these income streams will be reduced in the coming months if not years as a result of the market action. That is why having multiple income streams is so important. I will need to work harder at bringing along more and more streams.
2. Diversification - Related to item #1, diversification is extremely important. If the tech bubble or Enron hasn’t taught us this lesson, then this financial meltdown will. Anyone who had all their assets tied up in Lehman or AIG now have nothing. Diversification is not just important when buying stocks. To hit on item #1 again, you should diversify your income streams. Anytime one goes away, you have several others that can take over.
3. Don’t panic - It is hard not to do, but try not to overreact and panic in these rough times. As I mentioned earlier, many people are really panicking right now. While people should definitely be concerned with what is going on, acting without thinking doesn’t make a lot of sense. You should never immediately react to an event without first thinking it over and reviewing what action you should take.
4. Always look for new investment opportunities - I always try and find good in bad events. You should always be flexible in your investment choices and look for new opportunities when they arise. For example, with the recent housing market slump and rising foreclosure rates, now may be the time to purchase a rental home. I know that I have adjusted my thinking to consider this as a possible new income stream. Look what Bank Of America did this week by snatching up Merrill Lynch. I am sure they were not thinking of this a few months ago, but took advantage of the financial mess and will more than likely come out stronger by making this move.
5. Review current assets and holdings – This should be done every few months at the very least. Too many people purchase assets in their retirement or savings accounts and then never look at them again for years. You should always go back and review your holdings. One question that everyone should be asking right now is - how much money is federally protected in a bank account? Do you know? If your bank files for bankruptcy tomorrow, do you know if your hard earned dollars are safe?
What tips can you add to this list?
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Scott @ The Passive Dad 09.18.08 at 11:19 am
I see we were thinking along the same lines. I only watched CNBC for 2 minutes this morning and saw that the sky was not falling, so I turned it off. Back to focus on writing and visiting great sites like yours. I also plan to get out and exercise today to get my mind off the market. BAC and GE look very attractive. Ken Lewis sure looks happy after picking up Merrill so cheap.