How to Thrive in a Weak Economy
The news is grim. Home values are dropping, the subprime mortgage mess is spreading, the stock market's uncertain, and the 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 strategies to do your best in this choppy economy.
No. 1: Don't panic
Stock-market gyrations can give even the hardiest investors a case of the jitters.However, converting all your investments to cash is likely to do far more harm than good, says Joe Baker, a certified financial planner and president of Alcus Financial 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 soon -- say, within two years -- it's best to remind yourself that good and bad times pass. Historically, the market's made up its losses fairly quickly.
Since 1945, there have been 11 recessions as defined by the National Bureau of Economic Research. The Standard & Poor's 500 Index -- 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 recession, according to Sam Stovall, chief investment strategist at Standard & Poor's.
After that point, the market typically starts to regain its footing. If you include the very worst meltdown, when the S&P 500 lost more than 45% of its value, it took 19 months for investors to recoup their losses. But exclude the huge 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 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."
Stovall's advice to today's worrywarts is direct: "Don't freak out."
No. 2: Bulletproof your portfolio
Sure, we all know the warning about putting 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 of five workers participating in a 401(k) plan never rebalanced their portfolios between 2000 and 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 to safety-hungry investors 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 age and risk tolerance -- not the current state of the economy -- should drive your investing. For example, workers in their 20s and 30s should have roughly 80% to 90% of their assets in equities, while people in their 60s approaching retirement may devote up to 50% of their assets to stocks.
"Use market declines as opportunities to add to holdings," says Stovall.
Some experts warn that it's a mistake to put your faith in gold, commodities or any other asset that seems popular now that the stock market is roiling.
"If you liked the market four months ago, it's at a 15% 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."
For Steps 3, 4 and 5, Click Here.
