Slow economic growth, high unemployment, more market volatility: Welcome to the “new normal” economy.
While the “new normal” doesn’t sound particularly promising, a sluggish economy doesn’t have to derail your financial goals. There are some simple things you can do to help protect yourself from whatever the future holds.
Tip 1: Expect a Bumpy Ride
There is no such thing as a financial crystal ball — even the most savvy industry insider can’t predict when the next market decline will happen. But, using history as a guide, the only thing we can be reasonably sure of is that another crisis will upset the markets at some point.
It’s not a new phenomenon — stock market declines are more frequent than you might imagine. According to Standard & Poor’s historical data, there have been 18 corrections (including the current one) since 1946 that posted average declines of 14%. The latest one was a biggie — arguably the most significant market downfall since the Great Depression. Couple that drop with a slower-than-average recovery and tremors in many foreign markets, and you’ve got a recipe for a prolonged ride of extreme highs and lows.
Tip 2: Don’t Follow the Herd
All that volatility and uncertainty is making investors nervous. From January 2008 to July 2010, they pulled nearly $250 billion in assets out of stock mutual funds.1 Where did those assets go? Much of it went into bond funds, which recorded a whopping $375 billion inflow in 2009 alone, as investors searched for “safer” havens and better returns.1
Rebalancing your portfolio is generally a good idea, but it shouldn’t be done simply to chase gains or as a knee-jerk reaction to a negative event. Before you make any big changes in your investing strategy, be sure to think about your reasons for making them. Flocking to a “hot” investment is rarely a good idea, especially if it compromises your risk tolerance or causes your portfolio to become too heavily weighed in a single asset or asset class.
Tip 3: Continue to Boost Savings
For years, the savings rate in America hovered near zero. With rising home equity to tap and access to other loan options plentiful, consumers had little need to save for a rainy day. That is, until 2008, when the mortgage bubble burst, housing values plummeted, the stock market nosedived, and millions of Americans were left jobless in the fallout.
Now saving is in again. According to the Bureau of Economic Analysis, the average personal savings rate in the United States has climbed to over 5% since the fourth quarter of 2008, peaking at more than 7% in the second quarter of 2009.
Finding a comfortable middle ground between saving and spending may help Americans be better prepared for the next downturn. Funding an emergency account is also a smart idea. Many financial professionals recommend saving at least three to six months’ worth of living expenses. But with unemployment expected to be higher than normal for the foreseeable future, a cushion of 6 to 12 months may make more sense.
Tip 4: Keep Paying Down Debt
Another silver lining of the market crash has been a renewed focus on paying down debt, especially high interest rate loans such as credit cards. According to the Federal Reserve, Americans cut their credit card debt by 9% from the second quarter of 2009 to the second quarter of 2010. While that’s great news, Americans still owe over $800 billion on their cards. That adds up to an average debt of about $15,800 per household. With average interest rates hovering over 14%, it’s a balance many consumers should strive to reduce.3
Jose Freyre, MBA, CFP® is Founder of Milwaukee-based Monarch Wealth Management, an independent wealth management and investment planning firm serving the needs of individuals, families, and business owners. Mr. Freyre can be reached at 414-935-4900 or via email at jfreyre@monarchwm.com.
1Source: Investment Company Institute, Mutual Fund Fact Book, August 2010.
3Source: CreditCards.com, September 2010.
Securities offered through LPL Financial, Member FINRA/SIPC
This material was prepared for Jose Freyre’s use.
