I am not expecting a lot of sympathy from the people who read this, but I thought that it would be useful to share how Recession 2.0 affects even those that some would consider rich.
In 1998, I was $30,000 in debt, but just seven years later I had managed to turn that into $7 million in cash, through some smart financial planning and sensible investing that I write about on my blog. It didn’t hurt that my businesses finally started to generate some cash.
As if that wasn’t enough, over the next two years I sold three businesses, more than doubling my ‘good fortune.’ It was at that point that my family and I decided to relocate back to our home country, Australia, and buy a house there.
Even applying our strict financial spending rules (such as never having more than 20 percent of our net worth invested in the equity in our own home), we realized that we could easily afford to step up from our $1.5 million U.S. home, so we bought a $3 million home in Australia -- one needing at least another $1 million in taxes, closing costs, and renovation.
But, then we didn’t count on Recession 2.0.
You see, while we were fortunate that a lot of our money was sitting in the bank in CD’s, a good chunk of it was invested in the stock market and – more importantly – the majority of that was sitting in the stock of the company that acquired mine.
Literally two days after taking ownership of the stock, the company announced a profit warning and the stock immediately tanked. And, just a few weeks later – while I was still deciding whether to cut my losses or wait for a rebound - the U.S. stock market collapsed.
My stock had lost nearly 85 percent of its value in a matter of weeks.
Like many others, I also had some of my money invested in stocks, as well. Fortunately, I had already moved much of this (but not all) into cash in the weeks leading up to the crash.
This is no worse than the fate of many retirees who have their money tied up in their 401(k)s and Roth IRAs – just the size of the numbers is different.
The result is that even those that others would consider ‘rich’ are not a bottomless pit of cash; a recession can affect us in dramatic ways just like everybody else.
But, the ‘cure’ is just the same as for you: We must decide if we can still afford the things that we own and the commitments that we have.
It is not all dire news for us, we still had more than enough in the bank in CD’s and in other ‘safer’ investments to ensure that we can ride out this storm – a lesson in retirement planning well learned!
But, right now we are deciding whether we will keep the new house or look for a smaller/cheaper one (yes, a $2 million house is cheaper, relatively speaking), and we need to decide whether to keep the balance of our net worth in cash, for fear of further crashes and a prolonged recession, or whether to start aggressively investing back into the stock market, as Warren Buffett is doing, to take advantage of the current down cycle.
More zeros, more decisions … bigger problems, maybe. But one thing that Recession 2.0 has taught us: being ‘rich’ really doesn’t change your life in the fundamental ways that really matter.
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