Getting agreement among a group of people these days is probably more challenging than in recent
memory. When it comes to the economy, however, virtually everyone concurs: This economic downturn
is one of the toughest many of us have experienced in our lifetimes. The hopeful news is that, like all
cycles, it will end. The question is how can you weather the storm and be in the best financial position
when things begin to improve?
There are a number of key strategies that can make a significant difference as you plan for or re-evaluate your financial situation during these tumultuous times:
1. Review Your Living Expenses
Categorize your outflow into three groups; 1) Survival, i.e. those like food, housing and health care that are essential; 2) Desired, which are discretionary lifestyle extras like entertainment and vacation; and 3) Legacy, which include gifts and inheritances to others. This prioritization will be valuable should your income decrease and as a basis to project your retirement needs.
2. Consider Refinancing Your Mortgage
With mortgage rates near historic lows and some banks beginning to lend again, consider whether you could benefit from a refinance. Getting a lower interest rate could reduce your living expenses, thereby freeing up cash that could be used to reduce debt, increase savings, or just a little buffer to help make ends meet.
3. Don’t Time the Market
While tempting, studies show that timing only accounts for 1.8% of total portfolio performance (adapted from Financial Analysts Journal, May-June 1991). Another study by ICMA-RC1 (www.ICMARC.org) showed that if you missed just 10 of the top performing days over the 20 year period (1/1/88-6/30/08), your portfolio would have underperformed by almost 5% per year! Remember, by the time you see performance it is usually too late.
4. Re-Balance Your Portfolio
During any business cycle there are winners and losers. Make sure your investments are balanced and diversified according to your risk tolerance, timeframe, growth and cash flow needs.
5. Be Skeptical of Doomsayers
Especially during tough times, prognosticators abound. Economics is a ‘soft’ science at best wherein even the brightest Nobel Laureates are wrong a significant percentage of the time. There is an old saying, “put 5 economists in a room and you’ll get 10 different opinions.”
6. Seek Objective Professional Advice
Many blame Wall Street’s “sales” mentality for some of its economic woes. Just as surgeons don’t operate on family members themselves, it is good to have an outside opinion. Get advice from an independent Certified Financial Planner who has no bias from their employer’s proprietary products. A “client centric” model that focuses on your needs first and foremost, and integrates investments with the rest of your financial picture, may be the best road to success.
7. Update Your Retirement Plan
Everyone can benefit from having a plan that can provide lifetime income and establishes the feasibility of their retirement goals. If you don’t have one, get one. If you have one, update it to see what adjustments may be needed. Remember, those who fail to plan, plan to fail.
8. Consider Getting a Second Opinion
Just as in medicine, a qualified second opinion can never hurt even if you believe you have all your bases covered.
9. Dollar Cost Average
If you have extra cash, consider investing a specific amount each month. If you are eligible for a 401K or other retirement plan through your employer, keep funding it. The DCA automatic process is a disciplined method that helps you buy fewer of the expensive shares and more of the lower priced shares as markets fluctuate. While no guarantee, it can over time mean a lower average cost and growth opportunity.
10. Keep the Long Term Perspective
Despite what you may hear, we are nowhere near another Great Depression where unemployment exceeded 25% at its height (our current unemployment is just over 7% by comparison). The reality is we are at or near the trough of a business cycle that has been exacerbated by an extended period of economic growth. Just as when we were in the midst of the “good times” and no end seemed in sight, it is tempting to see the “tough times” as going on forever. The unprecedented, worldwide government efforts to stimulate our economies will pay off and we will get through this.
11. Remember the Pendulum Principal
Investor behavior is prone to excesses and deficiencies much the way a pendulum often over-swings its mark. One need only look at the current near zero or negative yields on Treasury Bills to realize that the flight to safety may be overdone. Just as we had the “Tech Bubble” and the “Real Estate Bubble”, we are likely in the midst of a “Panic Bubble”. Resist the temptation to “follow the herd” in making emotional decisions that you may regret later.
The irony is that people are not naturally wired for investment success; they typically sell low and buy high because of emotional reactions. Study after study cites this as the number one factor in explaining why individual investors chronically underperform the markets. It is another reason why it is critical to have an objective plan that can provide guidance during unnerving times.
Investors are reminded that dollar cost averaging (DCA) and diversification does not assure a profit and does not protect against loss in declining markets. Since DCA does involve continuous investments in securities regardless of fluctuating markets, investors should consider their willingness to continue purchases during market downturns.
Uncertainty over the economy and financial markets has many people concerned about their financial futures. For friends, relatives and colleagues who may find this information helpful, please feel free to share with them. Remember, for those who could benefit we offer a complimentary “Second Opinion” that can offer an objective financial review. Keep us in mind for those who may be seeking a wealth advisory firm like ours—one that delivers services according to the needs and perspectives of its clients.
This information is not considered a recommendation to buy or sell any investment or insurance and is being provided for information purposes only and is not a complete description, nor is it a recommendation. We strongly recommend an advanced tax and estate planning expert be contacted for further information since Wells Fargo Advisors Financial Network LLC (WFAFN) does not provide tax or legal advice. Any opinions are those of Mitchell Kauffman and not necessarily those of WFAFN. The information has been obtained from sources considered to be reliable, but Wells Fargo Advisors Financial Network does not guarantee that the foregoing material is accurate or complete. Prior to making a financial decision, please consult with your financial advisor about your individual situation. Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN)/Member SIPC. Kauffman Wealth Management is a separate entity from WFAFN.
Mitchell Kauffman provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.
Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.
Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara.
For more information, visit www.kwmwealthadvisory.com or call (866) 467-8981. Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFN), Member SIPC. KWM Wealth Advisory is a separate entity from WFAFN.
1 Stocks are represented by Standard & Poor’s Composite Index of 500 stocks, and unmanaged index that is generally considered representative of the U.S. stock market. Past performance is not a guarantee of future results.
