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The Big Short


I saw the movie, The Big Short, this weekend. I had read the book by Michael Lewis several years ago so I was familiar with the characters of this true story. Plus, as a financial advisor during this period, I was intimately impacted by the housing boom and bust tragedy that became the Great Recession. The Big Short is a good movie and one that everyone should see, because people are already beginning to forget the pain of the recession and what got us there in the first place.

In case you have not seen this movie, it is about how a few traders saw an opportunity to bet against Wall Street banks that were creating esoteric investment instruments made up of low-quality mortgage loans that were packaged up and sold to investment and pension funds. Banks had begun pooling thousands of risky mortgages into bundles and passing them off as high-quality because they could not foresee a situation where people would not pay their mortgages or when home values would not continue to go up year after year. The movie does a great job explaining some very complex concepts. Of course we all know how it ends. The mortgage bubble pops, people can’t pay their mortgages, jobs are lost, banks are bailed out with taxpayer money, and nobody except for one guy goes to jail. (Spoiler alert in case you have been asleep for the last ten years: The guys placing the “Big Short” profited enormously.)

What lessons should you take away from The Big Short? First, no one has a crystal ball. Even the guys in the movie who ended up profiting from betting against mortgage backed bonds were taking great risks and had to put up a lot of money to make those plays. The average person can’t afford that, nor do they have access to this type of information. However, there are a few things you can do to keep your personal financial house in order in case of another financial disaster.

Do you have at least 20% equity in your home? If not, set up a plan to start paying that mortgage down as soon as possible. Or move into a more affordable house. One of the biggest mistakes I see people make financially is buying “too much house.” Believe me, your kids don’t each need a bathroom.

Are your investments diversified? That means you should not have too many holdings in any one industry, country or sector. And while diversifying doesn’t remove all risk it can reduce it. There are dozens of free web tools you can plug your portfolio into to see if your investments are spread out sufficiently.

What about emergency funds? The general rule of thumb is three to six months, but I say you should have as many months as it would take you to find a new job. And keep in mind, it has typically taken older people much longer to find good jobs than they expected.

Speaking of jobs, are your job skills up to date? Make sure you are employable at all times. Many people take for granted that they can get a job or that they don’t need to know the latest and greatest to be successful. Don’t be lulled into complacency. Keep building skills as well as the social networks needed to advance professionally.

Challenge all your spending. Look at your monthly bills and see what can go. Marketers use every means possible to part you from your money. Over the past year I have challenged a lot of my expenses and have saved thousands. Insurance, cable, internet providers, technology expense, groceries. I follow a few budget blogs and get lots of great tips; Tiffany the Budgetnista and Budgets are Sexy are two of my favorite.

Start the New Year off right and watch out for the next bubble. It may be just around the corner, but we simply can’t see it yet—just as the vast majority of people didn’t see the mortgage bubble coming in 2008.

Financial planning and advisory services offered through Athena Advisory Services, Inc.


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Advisory services offered through Athena Advisory Services, Inc. A Registered Investment Advisor. Tax Planning and Insurance Services offered through the Athena Financial Group.

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