by Leslie Haggin Geary
Wednesday, March 12, 2008 provided byBankrate
The news is grim. Housing values are dropping, subprime mortgage meltdowns are spreading, the stock market’s uncertain and the overall economy seems to be heading into a recession.
No wonder plenty of us are worried.
Still, you can protect yourself. Here are some experts’ top five must-make strategies to do your best now that the economy is likely in for a choppy ride.
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5 rules for economic survival
1. Don’t panic
2. Bullet-proof your portfolio
3. Don’t let your home become a trap
4. Dust off your resume
5. Reduce your debt and build savings
Rule No. 1: Don’t panic
The stock market’s gyrations can give even the hardiest investors a case of the jitters.
However, converting all your investments to cash is likely to cause you far more harm than good, says Joe Baker, CFP and president of Alcus Financial Group in Mount Pleasant, S.C.
“People are scared,” he says. “They’re asking, ‘Is the economy crashing? Should I move my 401(k) to a money market?’”
Baker answers: “Please do not, unless you need the cash tomorrow. You’d be making a huge mistake.”
Unless you need the money short-term—say, within two years—it’s best to remind yourself that good and bad times pass. Historically, the market’s made up all its losses fairly quickly.
Since 1945, there have been 11 recessions as officially defined by the National Bureau of Economic Research. The S&P;500—the index of widely held stocks used as a barometer for the overall market—generally has hit bottom six months into the typical 10-month-long recession, according to Sam Stovall, chief investment strategist at Standard & Poor’s.
After that point, the market typically starts regaining its footing. If you include the very worst meltdowns, when the S&P;500 lost more than 45 percent of its value, it took 19 months for investors to recoup their losses. But exclude the mega losses, and you find that it’s actually taken just eight months on average for the index to bounce back.
“The reason the market peaks before recessions start on average and troughs before they’re finished is that investors are anticipators,” says Stovall. They’re willing to become more optimistic once the bad news is out,” says Stovall.
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Stovall’s advice to today’s worrywarts is direct: “Don’t freak out.”
Rule No. 2: Bullet-proof your portfolio
Sure, we all know the warnings about putting all our eggs in one basket. But when it comes to investing, too few heed this advice.
One study by Hewitt Associates, for example, found that three out of five workers participating in a 401(k) plan never rebalanced their portfolios over a four-year period from 2000 to 2004. Failing to rebalance causes your portfolio to skew over time, leaving you overloaded with one kind of asset while owning too little of something else.
If you’ve neglected your assets, such imbalance could put you at greater risk.
Recent drops have left many investors in a position where they need more equities and less fixed-income. That may come as a shock for safety-hungry investors who are eager to stock up on fixed-income, cash and other “safe” assets.
“If your asset allocation was good for you six months ago, it should be good for you today,” says Ellen Rinaldi, executive director of investment planning and research at Vanguard. “The fact that the market is volatile should remind you to be appropriately diversified.”
Personal factors like your age and risk tolerance—not the current state of the economy—should drive your investing. For example, workers in their 20s and 30s should generally devote roughly 80 percent to 90 percent of their assets in equities while people in their 60s approaching retirement may devote up to 50 percent of their assets to stocks.
“Use market declines as opportunities to add to holdings,” says Stovall.
Remember, it’s a misstep to put your faith in gold, commodities or any other particular asset that seems popular now that the stock market is roiling.
“If you liked the market four months ago, it’s at a 15 percent discount,” says Brett Horowitz, a financial planner at Evensky & Katz. “It’s a great time to buy. When you buy at a point when everything looks ugly, that’s good. You’re buying low. It’s forward thinking.”
Rule No. 3: Don’t let your home become a trap
Experts agree that tough economic times mean homeowners must figure out if they’ve got the best mortgage possible. Many people have adjustable-rate mortgages that are about to reset higher, causing their monthly payment to balloon.
It’s imperative for these homeowners to refinance to a lower, fixed-rate mortgage that will give them more stability in their month-to-month finances.
Unfortunately, that’s easier said than done right now.
The nation’s credit crunch and subprime mortgage debacle mean access to loans is fast disappearing, or becoming prohibitively pricey, for borrowers with less-than-sterling credit.
“Interest rates are being more unevenly applied in the marketplace than they have been in recent years,” says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage trends nationwide.
If you count yourself among those with good credit and have a FICO score of at least 680, don’t squander current opportunities to save.
Recently, mortgage rates have moved up and down in yo-yo fashion. Try to take advantage of the best rate you can find.
It may be more prudent
