6 important lessons learned from the great recession of 2008 - aarp everywher...

This was a pipe dream. As the recession made painfully clear, you can't count on your home to be worth more than you paid for it when you're ready to sell. "Even if their

house sale does provide them with excess funds," says Elissa Buie, a Vienna, Va., financial planner, "they should not plan on those funds being enough to cover their living

expenses, as there is no way to know that will happen." Besides, everyone needs somewhere to live, and most Americans don't downsize in retirement. "The vast majority of

people stay in their homes until their 80s," says Stuart Ritter, a certified financial planner at T. Rowe Price: "Your house is a place to live and a lifestyle choice. It's

not an investment asset." Wall Street firms and banks earned huge fees selling subprime loans. Christopher Anderson/Magnum Photos 3. STOCK PRICES CAN KEEP FALLING A VERY LONG TIME This

painful fact of life is all too easily forgotten. In a bull market, the smart investor's mantra is "buy on the dips" — that is, buy when prices fall because they won't

stay down long. In bear markets, they do. Between October 2007 and March 2009, stocks plunged 57 percent, down a seemingly bottomless hole. Twelve years of gains disappeared in 17 months.

The big challenge in such a market is resisting the overwhelming impulse to join the stampede for the exit. History has repeatedly shown that sitting tight is the key to successful stock

market investing. If you sell, as many people did in 2008, you lock in your losses. That's a disaster — and the older you are, the less time you have to rebuild your savings. A bear

market is easier to endure if you know how much pain you're likely to face. As a rule of thumb, assume that your stocks and stock funds can drop 50 percent overnight and stay down for a

very long time, advises Larry Elkin, a Scarsdale, N.Y., financial planner. (The average bear market since 1900 has lasted about 14 months, with an average decline of 31.5 percent.) If you

can't stand to see your total savings fall by more than 25 percent, Elkin says, you should invest no more than 50 percent of your portfolio in stocks. If you sell in a bear market,

you'll lock in your losses. Marcus Bleasdale/VII 4. YOU CAN'T AVOID RISK BY AVOIDING STOCK MARKET Like everything else in life, investing involves trade-offs. With stocks, you lose

money when the market falls. But thinking only about that risk is like looking only one way when you cross the street. Look the other way and you'll see that with bonds, you risk

losing purchasing power to inflation. (In case you've forgotten, in January 2003 a dozen eggs cost $1.17, a pound of ground chuck cost $2.13 and gasoline cost $1.55 a gallon. This

January, the eggs cost $1.93, the meat cost $3.40 a pound and gasoline sold for $3.41 a gallon.) The best solution: Divide your money between stock and bond investments. You need stocks

because they can grow your money enough to keep pace with the cost of living. A healthy 65-year-old man today can expect to live into his 80s, and a healthy 65-year-old woman into her 90s.

"Many 65-year-olds should keep at least 50 percent of their portfolios in stocks," says Harold Evensky, a Coral Gables, Fla., financial planner. You need bonds because they can put

a floor under your stock market losses, says Christine Benz, Morningstar's director of personal finance. If you invest in both, you'll still lose money in a market meltdown — but

you won't lose as much, and you'll recover faster. LEARN ABOUT DISCOUNTS AND BENEFITS FROM AARP