Ten common sense financial strategies to help you weather tough economic times.
Negative 44 percent. That’s what one of my investment statements pegged my return for last year.
I tried to cope with the bad news by trotting out phrases I’d shared with clients as a financial representative for 16 years: Stocks will go up and down, but over time outperform all other investments. Even if a return was down for years, the market ultimately rebounded, as dependable as a happy ending in a romance novel.
But my years of levelheaded investment planning failed me when the chips were down-more literally when the blue chip stocks dropped, then dropped some more.
As the negative economic news continued to roll in, I was in near panic. How could my husband and I retire? What about sending our kids to college? Forget about going on vacation.
Seeing our assets deteriorate in the worst economic downturn in decades is both alarming and discouraging.
However, we must not forget that our real treasure is time spent with loved ones and enjoying the priceless gift of good health, which allows us to enjoy life.
No matter what our financial futures hold, we can follow practical tips that I learned while growing up on my parents’ small farm in the Midwest to survive and thrive.
1. You reap what you sow. It’s discouraging when an investment loses money, but you can’t let it derail your investment strategy by sitting out the market. Consistent investing over time is the best way to accumulate a nest egg and allows the advantage of dollar cost averaging. That means when you invest regularly, sometimes high, so you should make more over time. Continue your investment plans unless something in your personal situation changes that warrants a different strategy. For example, if you lose your job or are within 10 years of retiring, you may need to adjust your plans.
2. The early bird gets the worm. Much of the success of an investment strategy is the added value of compounding interest and reinvested dividends. Waiting to see what happens next with the economy is not a good idea. There is never a better time to invest than right now, so go full stream ahead and consider investing more. Your individual efforts at saving are more important than outside events.
3. A bird in the hand is worth two in the bush. Although investing can be exciting in some ways, be careful about investments that make claims that are “too good to be true.” Many investors have lost money by being tempted by claims of investments that “beat the market.” Weight the risk versus the reward in analyzing an investment. Even something as steady as U.S. Savings Bonds can be a good option.
4. Don’t count your chickens before they hatch. Many stocks made significant returns in the years prior to the market’s decline. Investors thought of those increases as permanent money in their pockets. However, the return on an investment can and will go up and down, until the money is withdrawn. Keep in mind that shopping on sale or buying low works in the stock market as well as at grocery and department stores. When your investment return is down, the stock market offerings are essentially “on sale.” Conversely, when you’ve seen a nice increase, maybe it’s time to move some into less volatile investments.
5. Save for a rainy day. Always have some money in liquid accounts, such as savings and money market accounts. Aim to have six to nine months of household expenses set aside. The silver lining to the economic may be that, if your credit is good, you could refinance a mortgage, which can help you accumulate more savings. Also in tough economic times some consumer goods are sold at deep discounts and the interest charged on loans may be lower.
6. Get your ducks in a row. To make good decisions, keep your financial information together and know where you stand. You won’t be able to take advantage of lowered interest rates if you don’t know your current mortgage rate, how much you owe, or don’t keep important papers handy to prove your income and liabilities.
7. Don’t put all your eggs in one basket. Diversify your investments by owning a mix of stocks and bonds based on your individual needs and your philosophy about investment risks. Get expert advice if you need help. Also, don’t invest all your retirement money so that it is tied in with your job. Think of Enron employees who lost jobs and retirement simultaneously. Take advantage of your employer’s discounted stocks, if available, but convert them into other investments when you can. And consider having some money in a couple carefully chosen places outside of your pension.
8. You can’t make a silk purse out of a sow’s ear. Although an investment prospectus can be challenging to read, learn to find the details about the expenses of an investment. If you can’t find it in print, ask. Numerous studies have found that some investments with the highest initial and ongoing fees are not outperforming the market. Even good investment returns cannot offset excessive fees. Always compare fees among similar investments before deciding where to invest. Consider index mutual funds, which often have lower fees because the stocks are not individually chosen but are preselected based on specified criteria.
9. Don’t let the foxes guard the henhouse. It has been widely reported that the institutions created as watchdogs for the financial industry broke this rule. And some “experts” have stolen their clients’ money. Investors must carefully research their current as well as their potential investments and advisors. If you seek expert advice, meet with more than one person and compare information. By educating yourself and moving cautiously, you may stay clear of fraud. Seek out the best advice available and double-check everything by going to national consumer Web sites, such as helpforinvestors.org or investoreducation .org, and calling your state regulator. Find out what a legitimate investment statement looks like so that you will recognize fake documents.
10. Separate the wheat from the chaff. When bombarded with economic news and investment information, work through a mental checklist. Ask yourself if the news is something that affects you personally or could in the future. Decide if there is action you should take now. If appropriate, do more research or consult an expert on the topic, such as a financial advisor, banker, or accountant.
Whether the market is up or down, you can have a solid investment plan if you remember to think like a farmer. No matter if the previous season brought good times or bad, drought or flood, farmers return to their fields as each spring arrives. They optimistically sow the new season’s crop with resolve and hope for the future.