Most people will admit that 2008 was a very tough year for investors. While much of 2009 provided a nice rebound, the fact is that some people lost so much money in 2008 that 2009 was only able to provide a partial recovery.
Many portfolios that plummeted during the recession still have a considerable ways to go to make up for what turned out to be the second most devastating financial period in our country's history.
As a result, many employees have learned that no matter how hard they try and how diligent they are about their finances, there are some forces beyond their control that will always make financial planning a challenge. However, unless they plan on putting their money under their mattresses, it will be necessary to take some risk to reach their financial goals.
Employees are skeptical
Generally, we've become more skeptical of the institutions and the people that represent the financial world. This skepticism has made us more conservative with our money. A recent survey by Fidelity Investments found that four in 10 workers in their 20s and 30s are now more conservative because of the recession, and studies show that early life experiences can influence lifelong investing behaviors.
For employees, financial setbacks have been compounded by the devastation experienced at the workplace: workforce reductions, survivor guilt, poor morale, reductions in pay, the elimination of 401(k) matches and the phasing out of traditional defined benefit pension plans.
Now more than ever, employees need to prepare for their financial future as thoroughly as they can, using the most reliable information they can gather and the best financial tools they can get their hands on and, above all, seek to avoid becoming too conservative, overconfident or complacent in managing their finances.
What to do
Many employers provide 401(k) education for their employees. However, there is little movement in the workplace to provide the training that many employees need most, and that is basic financial literacy training - managing one's finances on a day-to-day basis and planning for one's financial future.
There is no sure-fire way to guarantee that one will achieve personal financial success, even with sound financial training, but you can bet that the odds of being a successful financial planner and investor are increased dramatically when one learns some basic financial principles and learns how to use some financial tools.
Employees today need more help than ever in planning for their financial futures because it's gotten harder to be prepared for the long term. Many workers today live paycheck to paycheck, so there isn't a nest egg to draw from to cover extraordinary expenses. It's important for employees to understand that, by building a healthy cash reserve, investments don't have to be sold to pay for unexpected expenses.
Tell them about the magic of compound interest. Talk to them about developing net worth statements, tracking expenses, building a budget, and setting short- and long-goals and action plans to achieve those goals. Harvey Mackay of 'Swimming with the Sharks' fame says: "It's not enough to simply know your goal. You've got to know how you're going to achieve it. Frame your goals in terms of tasks and performance, and not just outcomes."
Let employees know that it's important to monitor investments and that rebalancing investment portfolios should be considered periodically. Make sure they understand how bad credit can affect their ability to make major purchases and how long it can take one to recover from a bad credit history. And tell them about diversification and the critical importance of saving and investing for retirement.
As Brian Rogers, chairman and chief investment officer for T. Rowe Price and fund manager of its equity income fund, noted in his book: "Human civilization has endured much in the past century, including two world wars, the Korean War, the war in Vietnam, Watergate, the savings and loan implosion, the Argentine peso crisis, the Russian ruble crisis and many other world-shattering events."
"Each time the human race has managed not only to survive, but to go on and prosper even more," he writes. "Had we put our investment capital under the mattress each time a crisis reared its ugly head, we never would have benefited from the market rebounds that followed. Each time a bubble bursts, it is critical to remember that this, too, shall pass."
Rogers goes on to say that, "we need to take measures now to protect ourselves against the next tumultuous financial cycle. We do this by not overextending ourselves financially, remaining well-diversified, keeping our own tolerance for risk at the forefront of our investment decisions and establishing a long-term investment strategy that makes sense to us in all market environments."
While an employer can't make decisions for the employee, the employer can act on the employee's behalf in making sure that sound financial training and tools are available that will help protect them against the next tumultuous financial cycle. The rewards are many for the employer and employee.
Contributing Editor Wayne Hanson, SPHR, CEPF, is an HR consultant with a special interest in financial literacy. He has provided HR support to the private sector in a number of different capacities.
