The Potential of W

Don’t worry.  This isn’t a political posting about our former president. 

Most people expect a recovery from this recession to come in a V shape.  The economy was at a peak, it has fallen into a valley and seems to be heading in a generally upward direction – in other words it looks like the letter V. 

We Americans tend to think about the economy in what I call “The Eternal Now”.  I don’t mean that in a positive metaphysical way of living for the moment.  I mean that we tend to think that whatever is happening now will happen forever. 

When the stock market was booming, people didn’t want to keep any money in safe cash type investments.  They wanted all their money in the stock market where it would – they assumed – always be growing.  People borrowed against the value of their home because the house would be worth more tomorrow than today and they could always just sell it if they needed to.  They paid for everything with a credit card because their income would always go up. 

Sound familiar?  And now too many of the folks who were thinking this way have no money for emergencies, had to sell stock market investments at a low to pay for necessities and can’t pay their mortgages because they lost their job. 

The economy has started a shaky move up, but some of the things that are helping it could cause it to take another sizeable dip before it’s truly recovered.  The government obviously can’t bail out everyone forever.  And the influx of government money in the economy could cause inflation, which could cause another dip in the markets and our general productivity.

So if you’re starting to get back to some of the bad habits that got us into a recession in the first place, stop.  Spend less than you make.  Build up an emergency fund in something really boring like a bank savings account.  Don’t fund your life with debt.  The recovery may look more like a W.  It may go up, then go back down, before it starts a more steady recovery.  Your job isn’t to predict the economy.  Your financial responsibility to yourself is to be prepared if things aren’t smooth in the economy.  Then you’ll be part of the solution, not part of the problem.


Dancing in the Rain

About the time that clients were receiving their monthly statements on their investment accounts, my business partner and I noticed an influx of calls and e-mails.  The general question being asked was “Am I okay?”  We work to position our clients in all aspects of their financial lives to make it through difficult financial times.  In our minds, that’s as important as taking advantage of financial opportunities – for some people it’s actually more important.  Our clients know that and generally talk-the-talk and walk-the-walk of diversifying investments, staying calm during difficult times, and making decisions based on factors other than fear or greed. 


But these are pretty unnerving times and even some of the most fearless individuals are beginning to have little beads of sweat popping onto their foreheads.  A friend forwarded this anonymous quote to my business partner: “Life isn’t about waiting for the storm to pass.  It’s about learning to dance in the rain.”


So let’s look at a few “dance moves” for current times:

         Eliminate frivolous items from your spending.  Unless you’re spending more than you make or you’ve lost a major source of income, don’t go overboard.  Everyone needs some rewards built in to their budget. 

         Have funds available.  Make sure you have 10% of your annual pre-tax income where you could get to it pretty quickly and another 20% or so when you could get to it over time or with some tax consequences. 

         Don’t put the rest of your money all into the stock market.  Beyond your highly liquid money, also have some that’s in pretty boring stuff life certificates of deposit and government bonds.

         Stick with quality.  This is a great time to get bargains on quality.  But don’t be speculative.  High quality diversified mutual funds are often better for the average consumer than individual stocks or mutual funds that concentrate on only one industry.  Professional advice on your situation is warranted.

         Don’t be penny wise and pound foolish.  Don’t be afraid to get professional advice.  Have a pro do your taxes, consult on your investments, and advise you on your overall financial situation. 

         Don’t scrimp on things you’ll later regret.  If you can afford some niceties that are timely, get them.  Buy holiday gifts, get professional portraits of your high school senior, take the vacation you had planned.  Don’t miss meals to do these things, but when times are good again, you don’t want to be sorry for once in a lifetime things you missed. 

         Be patient.  It may seem that the economy fell apart over night.  It didn’t.  The poor decisions and waste that impacted the financial markets and several of our industries have been going on for awhile.  The solutions will take time to be completely formed and implemented and the results will take awhile to be fully realized. 


Mistakes should be learning opportunities, so we should all take note and become wiser.     

What To Do About Current Economic Turmoil

I generally don’t like to watch many of the financial news networks.  For my tastes, they tend to focus a bit too much on the exciting short play and not quite enough on prudent long term personal financial issues.  But late last week I couldn’t help but overhear a commentator (who’s name I unfortunately missed – I’d like to write him a fan letter) say that the current market is being fueled by fear, not facts.  Bravo!


Let’s look at a non-financial example of how this works.  Think of some of the tragic injuries and deaths associated with fires.  A building is burning and instead of everyone making a calm exit, they rush toward the door, trample other people, block the door, and people die needlessly.  So it’s not the fire that kills people, it’s the fearful actions of people at the scene of the fire.  The fire is dangerous and people shouldn’t just sit on their hands and see what happens if they don’t take action, nor should they take that particular moment to study fire safety or look for where the fire started and scold the people who caused it.  But actions guided only by fear will only make the situation worse. 


Is the current economic situation in this country bad?  Of course it is!  And it was brought about by big businesses that made decisions they could see were unwise.  Along the way many consumers contributed to the problem.  Some were uninformed about the risky deals they made, others were greedy.  So what do we do now to keep from getting injured in the current panic?


(1)    If you’ve got a good financial plan that has some “what if” safeguards built in, stay the course.  That good financial plan will have diversified investments and savings you can access if you need them. 

(2)    If you don’t have a good financial plan, get one.  Start today spending less than you make and putting some money in emergency savings.

(3)    If you’re part of the problem, start making informed decisions about what you’re going to do to remedy your role in the turmoil.  That may be financing your home to a traditional mortgage, selling your home if it was one you could never have afforded, getting out of your job that preys on those less informed than you, or giving a job to someone in your community that needs one. 

(4)    Don’t let Congress get away with pointing fingers instead of taking action.  This isn’t an accusation against either party.  The news out of Washington since the Treasury Secretary and SEC Chairman made their proposal is beyond disappointing – bipartisan as the disappointment is.  What the mainstream news gave us was lots of our politicians saying ”I don’t know what we need, but that ain’t it!”  There are many potential paths to take us forward and only one, which in fact may have many flaws, has been presented so far.  At this juncture, we don’t need politicians; we need statesmen and public servants.  Let your Congressional Representatives and Senators know that you expect bold and decisive leadership now, not mudslinging at those who come forward to make proposals.


And that goes for all of us.  Now is the time to be part of the solution, not part of the problem.  So don’t contribute to the problem by participating in a stampede.  Calm down, take stock of where you are, and make some wise decisions. 

The Market and The Election

People often ask how the stock market will react to who wins the presidential election.  I couple of elections ago I heard an economist give a very rational explanation of what happens around major elections.  It was that the market doesn’t like uncertainty.  It’s not a matter so much of who wins—although history does seem to show some economic trends that seem to follow the style of leadership the country has—it’s just knowing that a decision has been made.  It’s never wise to do market timing or other speculative moves based on what the political system will do to our economy.  For instance, last fall I heard a very credit economist say that the Democrats were obviously going to win the next presidential election and Hillary Clinton was obviously going to be the Democratic nominee, therefore, Hillary Clinton would be our next president.  He then gave an economic forecast with that basis.  For obvious reasons, I’ve thrown away my notes on that presentation. 


Having a good foundation of diversified investments, enough money in accessible savings for emergencies, and a regular program of socking money away is a good plan to get through the coming election season.  No matter who wins.