Keep Perspective In Dire Economic Times

by Patrick Cataldo, Associate Dean for Executive Education

You know, it really is true: being gripped by fear is the only thing we truly have to fear. The causes of our banking and financial meltdown will be discussed for decades. The great business schools—including the Smeal College—will train the next generation of investment professionals using lessons from this debacle. But right now it doesn't matter how we got here or who's to blame. What matters most is what we do next, as individuals, to shield ourselves from financial ruin. The consequences of inaction or taking the wrong actions will be dire.

First, we all need to maintain our perspective.

Every generation has lived through turbulent financial times before and they are not fun. For veterans, it was the crash of October 1929. For baby boomers, it was Monday, Oct. 19, 1987, when stock markets around the world crashed and shed huge value in a very short period of time. For Gen Xers, it was Monday, Sept. 17, 2001, the first day that the market was open after the Sept. 11, 2001, attacks. And for Nexters, it was Monday, Sept. 29, 2008, when the market suffered its worst single-day points loss—777.68—after the proposed $700 billion bailout plan failed to pass in the House of Representatives by 23 votes.

Times of financial uncertainty require personal actions to protect your net worth. But what are the right moves to make and when? No one really knows for sure but professional financial advisers can offer perspective, scenarios, and a sense of reality to portfolio considerations amid the mayhem.

Having a balanced investment portfolio has almost always been a safe bet. But today, all bets are off. This is a very serious situation; no time to go it alone.

Jeff McClarren, of McClarren Financial Advisors, suggests that clients "not accept the same risks on the interest side of their portfolios as on the stock side. With interest-earning investments, safety trumps risk." If there ever was a time to be more defensive with interest-earning assets, now is the time.

McClarren has been advising his clients "to switch any money market funds they have that are not FDIC insured to money market funds that in vest in Treasury securities." In addition, he's been "advising to move any savings that exceed the FDIC insurance limits per depositor per in ured institution to another bank or savings institution for maximum protection."

In 401(k) accounts, there often will not be an insured option or Treasury option for money markets and McClarren cautions against "going for long-term Treasury bonds as a substitute. Treasury bonds are not the same as money markets and with interest rate increases possible, you could lose principal if they rise."

Finally, he urges clients to review their end-of-year tax projections. Balancing potential capital gains with selling certain equity positions at a loss can help lower your overall tax burden.

William Martin, a certified financial planner, offers the following suggestions for retirement investors:

Keep to your plan: Resist panic. Having a well-thought-out retirement plan helps. Keep enough in cash or cash equivalents to meet your liquidity needs for the next 18-24 months. Avoid impulsive moves to sell shares of stock during a market downturn.

Continue to invest: Some of the most sophisticated investors think that those who weather a bear market will ultimately be rewarded by amassing bigger equity positions at better prices.

Monitor your asset allocation: The old rule of thumb was 100 minus your age to figure out the amount of your portfolio that should be in stocks. But many investors nowadays use 110 as the starting point to reflect baby boomers' increased average longevity.

The chairman and principal executive officer of Capital Research and Management Company, Jim Rothenberg, in his letter to shareholders advised that "the emotions of the moment always distract us from our purpose." Rothenberg sincerely thinks "that staying the course is the right plan. I am convinced that over time we will get through the present financial problems, and our nation and individual investors will prosper again."

In the midst of the current situation, keep focused on the eventuality of a recovery. Evaluate where you are with your investments, seek professional help from a financial adviser if necessary, and focus on keeping more of your assets. Doing so will help you sleep better at night.

This article originally appeared in the Centre Daily Times.