Eight Financial Questions for Success in a Bad Economy
November 6, 2008
1) How are my bank accounts?
As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) has temporarily raised the per-depositor coverage level from $100,000 to $250,000 through Dec. 31, 2009. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability.
2) Am I prepared to stay invested – no matter what?
We all remember the “Tech Wreck” of 2000. At the worst of that downturn, investors bailed out of the stock market or drastically cut back, only to get back in after they were “convinced” that the market was rebounding. In reality, they missed out on stock market gains during the early stages of recovery, and that’s costly in the long run. Of course, some investors looking for that late 20th century investment high also got into the real estate market, and they perhaps learned a similar lesson when that market started heading south two years ago.
In 2004, SEI Investments studied 12 bear markets since World War II. Investors who either stayed in the market through its bottom, or were fortunate to enter at the bottom, saw the S&P 500 gain an average of 32.5 percent (not counting dividends) during the first year of recovery. Investors who missed even just the first week of recovery saw their gains that first year slide to 24.3 percent. Those who waited three months before getting back in gained only 14.8 percent.
3) Am I diversified?
The NASDAQ lost 39 percent of its value just in 2001, and another 21 percent in 2002. Meanwhile, real estate investment trusts, which performed poorly in 1998 and 1999 when stocks were booming, had banner years in 2000 and 2001, performed so-so in 2002, and had an excellent 2003. Bonds also returned well during the bear market. Based on your risk profile, should you should think about splitting your money between diversified investments that fit your goals. Besides, moving holdings while the market is turbulent not only costs you money, but potentially returns as well.
4) Do I still feel the same way I used to about returns?
Having a long-term investment plan doesn’t mean make the plan and leave it to gather dust. You should periodically review your investment goals and your feelings about them since life has a funny way of changing over time.
5) How’s my retirement?
Obviously, the ups and downs in the market have been going on for a while and they might last a while longer. How will this impact your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-adverse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.
6) How’s my spending?
It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart, your debt low so it’s easier to set savings and investment priorities that will do you the most good when the economy and the market comes back.
7) Got cash?
You should have an emergency fund of three to six months’ worth of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, and with careful study, you should be able to have cash on reserve so you can take advantage of such events.
8 ) How’s my credit?
No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to schedule review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information on your credit data is truly your own.
This article on money questions for a bad economy is produced in association with the Financial Planning Association (FPA), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.
When the market is good, many people get complacent and forgot about planning and diversification thinking nothing bad will happen to them…
this economic crisis is a wake up call for many and I think everyone should seriously look at the 8 questions above.
The last question that I suggest will be: “WHAT HAVE DONE?”
Ren
[...] Smart Life asks Eight Financial Questions for Success in a Bad Economy, go ask yourself some of these questions, maybe you aren’t as prepared as you [...]
Some great Q/A content here. Enjoyed reading it.
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[...] Money Smart Life: Sure, our economy isn’t doing too well right now, but we can still be successful. Let’s ask ourselves these eight questions to see where we stand financially. [...]
[...] Money Smart Life: Sure, our economy isn’t doing too well right now, but we can still be successful. Let’s ask ourselves these eight questions to see where we stand financially. [...]
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