Insights & Advice

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Time to get back in the Saddle

As Memorial Day approaches, the memory of the last 18 months still leaves most of us shell shocked. Americans have lost trillions in the stock market. Our retirement accounts are in shambles. Those among us who depend on that money for daily living are counting every dime we spend. Many of us are unemployed while others worry about losing their jobs. Times are tough but rather than hide in your bunker, I believe it’s time to regroup and go on the offensive. Here’s why.

Although the economy is still in a downturn, recent economic data indicate that the decline has stopped accelerating. The trillions of dollars the government has spent to halt the free fall in the banking sector and the economy overall is working. We no longer fear a global financial collapse while talk of another great depression has faded. The stock market, which is considered a forward indicator of times ahead, has had a 30% plus move off the bottom. Even the housing markets are experiencing a little more interest of late with first time buyers taking the leap now that prices are a bit more realistic and rates at historically low levels. I’m not saying our economic problems are over, but we are, as Fed Chairman Ben Bernanke said, seeing a few “green shoots” on the landscape.

So the first order of business is to understand and accept that things have changed. The new reality is that the markets and the economy won’t simply spring back overnight and restore your lost wealth. It could take anywhere from two to ten years before that occurs. A Housing price rebound could take longer and may never reach the levels they did in 2005. So calculate the value of your retirement savings, your bank account and the new lower value of your home. With this new reality in your mind, reassess your circumstances. If you stopped contributing to your retirement plan, your IRA or your savings account reconsider that decision and starting saving again. If you can, save even more.
Re-examine your retirement expectations. What will it now take to retire at 62, 65 or later? Most of us will need to work longer than we expected. Accept it and get on with life.

If you haven’t established a financial plan, now is the time to do it. You may need the assistance of a financial planner to come up with a comprehensive plan although there are several internet sites that offer retirement planning software for free. If you already have one, review your assumptions and re-calculate how much you need to pay down your debts and save for retirement too. Start a debt reduction program, pay down the mortgage, the car loan and credit card bills. It will most certainly mean spending less but most of us have spent way too much in the past. Have you ever noticed how many storage facilities have sprung up all over this country? We have bought so much junk over our lifetimes that we now have to rent additional space just to store it.

One area that everyone should address is risk, specifically your risk profile. Over the past year I have encountered client after client who had claimed to be “aggressive” investors only to discover that in the face of declining markets their resolve to accept losses melted away along with their wealth. They discovered that they were extremely conservative.

“I am aggressive when the markets are going up but conservative when they go down,” said one client with a straight face.

The problem with that attitude is that one must be able to predict market turns consistently. In my 30 years of experience, I have never met anyone able to do that. What you, my dear reader, must understand is that a portfolio of 100% stocks will go up nicely in a bull market but when the markets turn you will be crushed. If you can’t accept that risk, diversify, invest in some stocks, some bonds or other defensive securities and keep some cash on the side. You won’t make as much but you also won’t lose as much either.

Inflation concerns should also be a priority when looking at the long term health of your portfolio investments. It is hard to imagine that inflation will remain as low as it is presently given the amount of stimulus that has been pumped into the global economy. At some point (most likely when the economy begins to recover) those trillions we used to save the system will come back to haunt us. Aside from commodities, those who invest in bonds should look at Treasury Inflation Protected Securities or TIPS.

For the time being, I would steer clear of annuity-type products. Although they do have some attractive features such as their tax-deferred status and guaranteed income, they are long-term investments and are loaded with hidden fees and expenses. As such, it makes little sense to me to buy these products when interest rates are at record lows and the stock market is cheaper now than it has been in over a decade. I believe an annuities’ time will come in a healthier economy when the terms they offer will be more attractive.

“But when do I have time to do all of this?” one client asked.

“Well Memorial Day weekend is coming up,” I reminded her, “Take a few hours over the three day holiday and get started.”

She promised she would and I suggest you do the same.

Posted in A Few Dollars More, Financial Planning