Protecting Yourself in a Rocky Economy
Author : By Susan L. Crowley    -   Subject : Finance

Analyze Your Finances, Tighten Your Belt

Since the Sept. 11 attacks, Americans have been assessing the damage to the economy—and to their own savings and retirement accounts. It's not a pretty picture. When the stock market, already in the doldrums, reopened for business Monday, Sept. 17, the Dow Jones Industrial Average sank more than 7 percent, ending the week off 14.3 percent, the worst weekly loss since the Depression. With $1.4 trillion drained from market value, most indexes receded to 1998 levels.

Since then, the market has seesawed. Other worries—a recession, rising unemployment and anxiety over a long battle against terrorism—sent the already wobbly confidence of consumers in the economy into a nosedive.

Many investors, retired or working, are worried about their finances and frustrated in figuring what to do. But it's not easy without a crystal ball.

"I don't know what my strategy should be," says Dale Farley, 52, an environmental engineer in Charleston, W.Va. "Everything has gotten so crazy, I don't even know what investment adviser to even listen to any more."

Still, economists and financial advisers are working to make sense of the situation and to reassure—or caution—investors about the fate of their nest eggs in a changed world.

John C. Bogle, founder of the Vanguard Group of mutual funds in Valley Forge, Pa., is cautiously optimistic and urges investors to take the long view. "We should be concerned not about what this quarter is or the next quarter or even next year, but really where will America be in 2005 and…in 2010."

He points to the resilience of the country and the markets after crises such as the bombing of Pearl Harbor and the assassination of President Kennedy. "America has been weathering crises…from the very beginning," he notes.

PaineWebber investment strategist Mary Farrell in New York agrees the stock market has held up for 200 years, but she says the terrorism visited upon the United States is unprecedented. "I think we're dealing with a much higher level of uncertainty."

The fact is, says economist Robert D. Reischauer, president of the Urban Institute, a think tank in Washington, "no economist really can tell you with any certainty what might happen next."

He does point out that the economy in the long run is in pretty good shape. "We're an economy that has improved its productivity and efficiency, and that's not going to change."

According to two surveys conducted in early October, most economists believe the country is already in a recession, but that it will be mild and short-lived—barring another major terrorist attack or a disaster such as an oil crisis.

"Then we're in hot trouble," says Marshall Blume, professor of finance at the University of Pennsylvania's Wharton School. "Consumer confidence would just dry up."

Robert Shiller, an economist at Yale University and author of a popular book about the risks of an overvalued market called "Irrational Exuberance" (Princeton University Press, 2000; paperback, Broadway Books, 2001), agrees.

While he says he's "sort of betting on a return to normal," he's not surprised at retreating stocks. In the market's heady days in the 1990s, Shiller tells the AARP Bulletin, "people were forgetting how history throws up problems."

Recent events are a reminder of the ever-present risk in the market, Shiller says. "I think the most important thing to tell people is, don't be too exposed to this stock market" since there could be "substantial further drops." Then he adds, "But no one can be certain about that."


FEAR OF SPENDING
Given the uncertainties and the prospect of an extended war, Richard Curtin, director of the University of Michigan's Surveys of Consumers, predicted in October that "consumers will shift their focus to increasing their savings in the months ahead."

Even though the Federal Reserve Board has reduced interest rates twice since Sept. 11—to their lowest level since 1962—and the Bush administration aims to pump well over $100 billion into the lagging economy, consumers at the moment "just don't feel comfortable" spending money, Wharton's Blume says.

Jim Hunter, 54, a retired Citicorp executive in West Linn, Ore., is one of those consumers. "We're eating at less-best restaurants," he says. "We're shopping at less-nice places. This is a normal reaction during recessionary times."

Nancy Haynes, 65, of Cinnaminson, N.J., says she and her husband are cutting back on vacations, gift giving and eating out and won't replace their old car—with 137,000 miles on it—anytime soon.

Even before Sept. 11, she says, "our portfolio wasn't anything near what it had been when my husband retired in January 2000…when the world was a rosy place."


WHAT TO DO NOW?
Cutting down on unnecessary spending is an obvious place to begin. "A first step for a lot of people," says financial planner Karen Schaeffer of Rockville, Md., "is just ascertaining the difference between a need and a want. Do you really need that latte every morning?"

You can do other things, too, to strengthen your financial security. Some advice from the experts:

Pay off credit card debt. With fees and interest rates on credit cards as high as 18 percent, "there's no way you're going to get that back in the financial markets," says Vanguard's Bogle.


Don't panic sell or panic buy. "The worst thing that can be done is to make immediate changes out of fear. You can lose a significant portion of your retirement that way," says Bob Baldwin, 68, vice president of Cumberland Trust & Investment Co. in Nashville, Tenn.
"My overall approach," he says, "is conservative but optimistic. To have a knee-jerk reaction or to panic is the worst thing you can do."

"Clearly the market is cheap," says Farrell of PaineWebber. But she cautions against rushing to buy until "some issues are clarified."

Go over your portfolio with a fine-toothed comb. "Examine the companies whose shares you own," says planner Schaeffer, to see if they will come back after the downturn. "You have to stop and think, is this the same company I bought?"
And don't hang on to stocks when you shouldn't. "Let bygones be bygones," Shiller says.

Rebalance your investments. Spread your holdings across a wide variety of investments in cash, bonds and stock to protect yourself from big losses in the future.
If you're too heavy in stocks, sell some, even at a loss, so you can buy other investments for diversification.

Most planners say the closer you are to retiring (or to needing a chunk of principal), the more conservative your portfolio should be, with fewer stocks and more cash and bonds.

Figure out how much risk you can assume—and tolerate. "A lot of retired people have underestimated the risk," says Shiller, and have been told they "should always stay the course and hold on … without ever asking what their course was."
Vanguard's Bogle agrees that if you can't weather another big drop in the market, then get out of stocks.

But he does suggest staying the course if your portfolio is diversified and you won't tap the principal for a few years. In that case, he says, "don't do something, just stand there."

Take advantage of low interest rates. Low rates have reduced income on certificates of deposits, money market funds and some (but not all) types of bonds. But they are a boon for anyone seeking lower mortgage rates or a car loan.


Create an emergency fund. Put cash and other assets you can liquidate quickly (but no retirement savings) in the fund. It should cover three to six months of living expenses if you're working, says financial planner Peg Downey of Money Plans in Silver Spring, Md., and two years or longer if you're retired. The fund is for unforeseen events, she stresses, not vacations or expenses that can be planned ahead.


Continue working. If you're retired and your income has seriously dwindled, you may need to get a job.
Retiree Nancy Haynes is looking for one. Since Sept. 11, she says her savings "have been hit one more time … and we still have to pay our bills."

And those nearing retirement may have to work longer. Dale Farley in West Virginia is rethinking his plan to retire in three years at age 55.

"I have a lot more uncertainty and reluctance to just walk away from the job early," he says. "[The struggling economy] makes you stop and think about things and what the future is going to be."

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