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.     

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. 

Stay the Course?

You’re generally not going to get market commentary here, but the big stock market downer today bears at least one note.

The stock markets have been and, in my opinion, continue to be the right place to save for the long term.  I realize that for some folks, long term planning is deciding where they’re going to lunch, so let me clarify that if you might need money in less than five years, stocks – including stock mutual funds and ETFs – are not the place for that particular money.  Your stock holdings should be diversified – mutual funds and ETFs representing a variety of industries and geographies can fit the bill for most. 

If you haven’t been putting some savings into conservative (downright boring) investments like money market funds or a savings account, start doing that yesterday.  Have some money in some other interest earning (almost as boring as money market and savings account) investments like corporate grade or US Government bond funds.

If you’ve put all your eggs in one stock basket, this might not be the best time to drop the basket on the cold, hard sidewalk and run for the hills.  If you’ve been a do-it-yourselfer, it’s worth the fee to get a good advisor to help you make some decisions based on your particular situation.  Sometimes letting things level out with your existing holdings and getting started on a new routine with your future savings can be a good strategy to minimize long term losses while getting on the right path.