How Robert Lost 80% of His Retirement Savings Overnight and What He Did to Protect Himself Now

by Dec 29, 2020Investment Strategy, Market Insights, Retirement & Pensions

Man lost 80 percent of his savings during Great Recession, now advises to consider gold as an investment.

Robert’s 2007 investment strategy

For many investors, retirees, and near-retirees, 2007 to mid-2008 was a great year. The stock market was at an all-time high. Real estate values were at an all-time high. And as a result, Robert F. from California was riding high. 

At the time, Robert was a managing director at Lehman Brothers. Lehman Brothers was the fourth-largest investment bank in the US, and investors as well as employees considered the firm “too big to fail.” Robert, like many investors, bought into the success of the company, and, as someone that has internal knowledge of how sound and safe Lehman was, Robert invested a significant part of his yearly salary into Lehman Brothers shares. In fact, 40% of his salary consisted of company shares. 

But that was not all Robert had. Knowing how important it is to diversify his holdings, Robert was diversified into other stocks as well, having his retirement portfolio packed in the best stocks at that time. Any financial advisor would have endorsed Robert’s portfolio as aggressive but not too risky.

Robert loses 80% of his savings overnight

However, in September 2008—just a few months into the crisis that proved that the term “too big to fail” is meaningless—Lehman Brothers filed for bankruptcy. Overnight, its shares became worthless, and 25,000 people lost their jobs. 

Robert quickly realized that the 40% of his salary that consisted of Lehman shares—money he had counted on as a major part of his investment portfolio—had become worthless. His other stocks crashed as well, and Robert estimates that he lost a stunning 80% of his total savings due to the financial crisis.

The implications for Robert? “Losing 80% of my investments meant that I’ve had to postpone my retirement by 15 years.”

Fifteen years. Overnight. And this happened to a market professional who was working in one of the most successful financial firms at the time.

Today, Robert follows a different strategy and stresses the importance of protecting your retirement portfolio by diversifying into several asset classes: “You’ll want some stocks and bonds, but you’ll also want to invest a portion into a more defensive asset such as gold, which can hedge your portfolio against financial crises.”

What would have happened to Robert’s retirement savings if he had invested in gold?

Let’s say Robert had $100,000 in his retirement savings in 2000. With the entire amount invested in stocks, he would have lost 40% just eight years later due to the financial crisis. However, if he had invested 30% of his portfolio in gold, he would actually still be up over 30% compared to 2000. 

In other words, by adding gold to his portfolio, his $100,000 investment would have increased by $30,000 since 2000 compared to losing $40,000 on a portfolio invested only in stocks.

If we expand the time frame to today, the case for gold is even more convincing: the $100,000 investment from 2000, when invested in the stock market, has turned into $180,000, but if 30% was invested in gold, the portfolio would be worth over $322,000 today!

Are you prepared for the next crash?

The Great Recession hit the US and the rest of the world really hard. The sentiment was that this must never happen again, and the Federal Reserve followed up its first round of quantitative easing (money printing) again and again over the following years to prevent another crisis. 

Yet, as the current pandemic has shown us all too clearly, the next crisis is always just around the corner, and we never know what will set it off. We’re still in the middle of the current crisis. More Americans will lose their jobs, more businesses will close, and more money will be printed before we can return to something that resembles “normalcy.” 

What we do know is that another crisis will come. And it could be even worse than what we saw a decade ago and earlier this year:

  • The overvalued stock market is at record highs despite the fact that millions of Americans are unemployed and thousands are dying every day from the virus. 
  • The dollar is weakening, and the pressure on the greenback is not expected to ease off in 2021.
  • The Fed is allowing, even encouraging, inflation to rise.
  • The Fed will continue its loose monetary policies “to infinity,” which means it will continue to print money and keep interest rates at record lows, which continues to weaken our dollar.
  • Political tensions remain high between China and the US, increasing the risk for an escalation of the trade war.

Gold as an investment protects your retirement savings

While these conditions are negative for the economy and the paper asset markets, they are positive for gold, which has a long history of not only protecting but also growing wealth. 

Many Americans, including Robert, could have benefited greatly from having gold in their portfolio a decade ago and prior to the March 2020 market drop. Last year, gold set a new record amidst the pandemic, and prices have consolidated in the $1,850–$1,900/oz range. 

But there is still time to diversify your investments with gold and benefit from future gains in the precious metal and from its ability to hedge against financial crises. You didn’t miss the boat if you didn’t invest in gold already! Banks such as Citibank and Bank of America are predicting that the price of the precious metal could reach $3,000 in 2021. 

If the banks’ forecasts are right, an investment in gold today would grow by over 50% in less than a year while protecting you from the next financial crisis—a crisis that could very well wipe out half a portfolio that’s invested only in stocks and bonds, like Robert’s. Can you afford to take that risk?