Stock markets are down Friday. Our country’s credit rating gets “downgraded” for the first time ever. Then stock markets are down Monday and rally a bit on Tuesday. The talk of a “double-dip recession” has begun…. At what point do you start losing sleep from worrying about what is happening in the financial markets? Or are you already losing sleep? What are you going to do?
You may not have found a way to directly change the course of the economy yet, nor would you probably want that job. (I wouldn’t.) So instead, here are five steps to take now to start to better protect your investments:
1- Locate all of your assets. One of the first mistakes that we see people make is that they do not know where all of their assets (cash, investments, etc.) are being held. For instance, you may have an old 401k that never got rolled over from a previous employer. Now is the time to find it. Make a complete list (with the date on the top) including each financial institution, the balance, and the person managing that money. For instance, if your assets are with an old employer, is anyone making sure that you are taking on the least amount of risk for the most return? (see #4 below) If your 401k is managed by a large company like Fidelity, do you have a representative there who helped you pick the appropriate balance of assets and are you checking in with them to ensure that is still appropriate? (We do this step in all of our coaching programs as it is essential that you have a complete set of personal financial statements to have true ownership of your money.)
2- Breathe and make a phone call. – Now is not the time to make knee-jerk changes to your portfolio. If you are trying to time the market, then you will also need to time when you get back in, which is often a much harder proposition. Instead, pick up the phone and call your financial advisor. (And if you don’t have an investment advisor, then email us now at info@ownyourmoney.com and we can suggest a few resources based on your preferences.)
3- Assess your anxiety. – Ensure your assets are invested with an appropriate level of risk so that you can sleep at night. Generally, the more risk that you are willing to take on, the more you are compensated for taking on that risk. Think of it like an actual roller-coaster. Do you need to go on the kiddie ride at a slow speed (and thus low returns for taking on minimal risk) or are you ready to ride fast and in the dark like Space Mountain (with high returns and more risk), or something in between? This is an essential discussion for you to have with him/her.
4- Ensure you are adequately diversified. – You want your investments to be appropriately diversified, that is in different asset classes, including cash, stocks, bonds, and real estate, as well as other alternative investments. This allocation will depend on your age and risk tolerance and needs to be reviewed every 3-6-12 months depending on the riskiness of your investments. As certain assets rise and others go down, you may need to “rebalance” so that you maintain an appropriate diversification.
5- Keep some cash. – You want to have a sufficient cash balance to cover your medium-term 5-7 year needs. This would include school tuition, a wedding, or a house down-payment, for example, to the extent that paying for those is coming from savings not additional income to be saved. So yes, this may mean that you have to sell off a bit now to take care of those known needs, but then at least you will know that you can ride the roller coaster and still have enough to cover your current cash requirements.
Here are some helpful articles/ videos for more info:
Surviving the Debt Deal (Newsweek- Jean Chatzky)
S&P Drops U.S Rating to AA, Fannie & Freddie Follow: 5 Easy-to-Understand Effects of a Downgrade (ABC News)
Dow plunges more than 634 points after downgrade (Yahoo!Finance)
Protecting Your Finances During Tough Economic Times- NBC clips (personal finance experts Farnoosh Tourabi, Vera Gibbons, and Jean Chatzky)
Surviving the Downgrade (Carmen Wong Ulrich)
As markets tank, financial planners advise calm (TODAY Money)
On Friday, we’ll post more tips on what actions you can take to generate that savings you’ve been procrastinating putting aside—so you can cushion yourself during this roller coaster ride.
Add a comment below now with any additional questions or comments you have about this roller-coaster ride…