Your Money
FAQs in troubled times by Bill Lynott
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S A BUSY BUSINESS OWNER, YOU’RE AFFECTED
by our troubled economy on two different fronts: First is your obvious concern about revenues and maintaining a healthy bottom line. Then, like everyone else, you also have the worry about your personal finances. Savings and investments for retirement and other purposes have been battered to the point where many people report losing sleep trying to decide whether their hard-earned money is safe, and whether they should be taking steps to protect it. Here is how the experts are responding to the most frequently asked questions (FAQs): Are my bank accounts safe? As long as your bank is a member of the Federal Deposit Insurance Corporation (FDIC), all of your deposits are insured up to the limits of FDIC coverage ($250,000 per depositor, per bank, until December 31 2009). After that, the limit returns to $100,000. Despite many bank failures over the years, not one penny of money covered by FDIC insurance has ever been lost. Should I sell all of my stocks? It would be difficult to find a financial professional who would advise you to dump all of your stocks, especially at this time. While the downturn in today’s stock market is a legitimate source of concern, it’s a far cry from our worst. The most recent bear market, March 2000 to October 2002, saw a drop of 49 percent in the S&P 500 index. Like every bear market preceding it, that one was followed by a healthy bull market that set new highs in stock prices. “Fluctuations in the market are a natural part of our economic cycle,” says Stacy Francis, Certified Financial Planner, New York, NY. “When the market is in a downturn it may seem logical to cash out, but before you do that you may want to think about your long-term goals for that money.” According to studies by Ned Davis Research, since World War II, the average expansion in our economy lasted 57 months while the average recession lasted 10 months. In the past 20 years, according to the study, we haven’t had a recession lasting longer than eight months. That’s why it’s important for you to keep a long-term view for your investments. When the market is in a slump, it’s only natural to worry that it will never end. It will end, and when it does, investors with the foresight to buy when prices were low will benefit the most. How closely should I monitor reports on the economy? “In an effort to sell newspapers and air time, the media
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trains investors to look out for the next economic number of the day,” says Jordan Kimmel, Magnet Investment Group, Randolph, NJ. “Whether it’s employment numbers, capacity utilization, or inflation statistics, there’s always a number of the day to tempt investors into overreacting. In reality, it is nonsensical to react to daily economic reports. No investment strategy is better than identifying superior companies and holding them while letting your money compound over time.” How much of my portfolio should I keep in cash? If there is one point that virtually all financial advisors agree on, it’s the critical need for you to maintain an asset allocation suitable to your personal circumstances. Asset allocation refers to the process of dividing your investable assets among stocks, bonds, and cash. The diversification mix right for you at a given point in your life will depend on such things as your age and your tolerance for risk. If your retirement is years away, most experts recommend relatively heavy investments in equities, 60 percent or more of your total portfolio. “However, if your time horizon is less than three years,” says Certified Financial Planner (CFP) Greg Womack, Edmond, OK, “stay mostly in fixed investments like CD’s, short-term bonds, and money markets.” For an asset allocation calculator that takes these and other circumstances into consideration, log on to http://www.forbes.com/tools/calculator/asset_alloc.jhtml. Once you allocate your assets in the mix right for your circumstances, it’s important to rebalance at least once a year. As the price of equities goes up or down, the ratio that you have established will change. If the value of your equities has risen, you may want to sell off some of them to restore your original ratios. If their value has dropped, moving more cash into equities may be appropriate. “If your portfolio is largely within an IRA, 401(k, or other retirement plan, consider rebalancing every quarter,” says Womack. “For a rebalancing strategy to work, you must own assets that don’t react the same way over differing Bill Lynott is a management consultant, author and lecturer who writes on business and financial topics for a number of publications. His latest book, Money: How to Make the Most of What You’ve Got, is available through any bookstore. You can reach Bill at lynott@verizon.net or through his Web site: www.blynott.com. Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax advisor for advice regarding your particular situation.