Four more ways to stop a financial crisis derailing your money goals

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So you’ve done your four basic sanity checks to ensure you survive the credit crisis: Your savings are safe, they’re earning at the higher rates of interest now available, you’ve got a plan to pay off any debt, and your mortgage is sorted for the foreseeable future.

Time to turn over and fall back to sleep?

Possibly… it’s usually a bit late to Do Something once a financial crisis is underway, and ‘Sell in haste, repent at leisure’ would be a good motto for us investors to pin above our PCs. If you follow the daily advice of the financial TV channels and churn, churn, churn with every wobble, the only person who’ll get rich is your stockbroker.

On the other hand, any financial crisis can be frightening, and the best way to fight fear is to be informed.

I think it’s best to calmly consider where you’re at, financially, and where you’re going, rather than fixate on screens full of red or speculation that the White House is going to have to be pawned off to pay down the US trade deficit. It’s an absolute certainty we’ll all encounter several testing times when saving and investing over our lifetimes, and cultivating a calm head will save you a fortune.

Stopping economic turmoil derailing your investment or retirement goals means keeping your eyes on the bigger picture, in good times as well as bad. Sure, it’s important to check your short-term money is secure (that your savings are safe, and that you won’t soon face a steeply higher mortgage bills, as I covered previously) but beyond that you really might be best doing nothing at all and waiting for the storm to pass.

Indeed, I’ve taken quite a general view with these four more longer-term financial health checks, since I’m absolutely certain I’ll need to refer to them again regarding some fresh crisis in the years to come!

1. Check your portfolio… calmly

At times of financial crisis, stock markets fall.

If you’ve substantial investments in stock market funds, general or sector specific, you’re likely well down.

Most sectors are hit, usually before any impact is apparent in the wider economy. Sometimes a specific sector hurts the most, as with the dotcom bust (although people forget lots of ‘bricks-and-mortar’ shares fell in the years previously, so it wasn’t quite so clear cut). The only consistent exceptions in this current crisis are investments related to commodities, and the market indices of countries dominated by miners and other commodity producers.

Has the world really changed enough to make a big supermarket retailer, a provider of networking technology AND a manufacturer of metal cans worth 10/20/50% less than a few months ago? Of course not. They were either overvalued then, or they’re undervalued now. Company specific falls in bull markets reveal bad news about the company, but general falls in bear markets tell you nothing about the company and everything about the market.

Note also that no crisis is all bad news, financially-speaking, since different asset types respond in different ways.

In this current credit crunch of 2007/2008, gold has risen. So have government bonds, such as US Treasuries and UK Gilts, due to their rock solid security. Corporate bonds have wobbled on credit fears, while interest rates on savings are up, even as Central Bank base rates in the UK and US have been cut, which is good for anyone with cash. Finally, house prices have started falling.

It’s because different assets behave in different ways in each crisis that experts urge us to diversify our portfolios, rather than putting all our money in stocks, bonds or property alone, or stuffing it all under the mattress. As asset going up will ease the unpleasantness of something else going down, just like the sugary syrup they put in children’s medicine.

What it means for us

• Collective investments such as funds and index trackers gyrate or fall when the stock market is unsettled. (During this current credit crisis they’re lurching up and down every week).
• Pensions linked to the stock market will also be down.
• Most investors’ current net worth will fall. If you’ve a big portfolio built over many years, the numbers can seem unreal and frightening when compared to say your salary.
• Diversified investing will reduce the pain.

Action plan

• Unless you’ve been silly (putting all your money into real estate, or tech start-ups, or a palm oil plantation, or some other overweight bet) the best plan is almost certainly to sit tight.
• Don’t sell just because the market falls. As Benjamen Graham said, just because a gloomy Mr Market has slouched up with a particular price on some particular day, that doesn’t mean you have to accept his price as final. Stock markets go up and down, and one day he’ll feel cheerful and generous again.
• If you sell every time the market falls, you’ll destroy your long-term gains…
• … unless you sell before they fall further, of course. But very few investors can consistently time market drops, and in my experience those who can seem to have trouble buying back in. As a result, few great investors are market timers. (For instance, Warren Buffet isn’t selling, and in fact he may be buying). Buying and holding over reasonable periods is a better strategy for nearly all of us, billionaires or not.
• If on sober reflection and several good night’s sleep you decide you really have overly exposed yourself to some particular market, consider slowly selling down your holdings. (Do consider though how you’ll feel if markets bounce back after you’ve sold out). With stock markets, it’s fairly easy to do this (which is why you should pause and think twice). With some assets, such as property, you’ll need to plan your disposals more carefully.
• Read up on asset allocation so you’re better diversified against future downturns. One very simple rule of thumb is to subtract your age from 100: hold your age in various bonds and the rest in shares. Some advocate an even simpler 50/50 ‘lazy’ strategy. The excellent My Money Blog has a fantastic primer on different asset allocation models. It’s US focussed, but the principals will apply in other countries, too.

2. Consider buying more shares while they’re cheap

At times of financial crisis, shares are usually a lot cheaper than they were.

Nobody ever knows exactly why markets fall, whatever they tell you: bull runs always end with a bear, but you’ll hear a dozen reasons why, which is reason enough to logically state they can hardly all be correct. Even with the current credit crisis, it’s hard to tell if say the sub-prime collapse is truly a cause or just a trigger. Before the downturn began in late 2007 we’d been broadly going up since 2003, which is a long positive run in historical terms.

The common wisdom is that the credit crisis has spooked investors into looking again at the risks they’re taking, yelping, and selling down their portfolios. Furthermore, some institutions have had to sell certain assets just to maintain their liquidity. As we’ve just discussed, you’ll be able to see the results if you’re an investor in shares or corporate bonds.

What it means for us

• Markets will be down – yes, we’ve already covered that.
• Some sectors are always cheap in a crisis, but the trick is to tell which have fallen because they were wildly overvalued before, and which have simply been dragged down by associataion. If you bought into tech companies in 2001, for instance, you bought too soon and lost more money, despite the huge falls already seen.
• For most of us, the answer is to invest via cheap index trackers or exchange traded funds, and simply buy the market rather than trying to be too clever.
• If you’re feeling lucky, some banking, financial and property companies have come down a very long way, and seem to be discounting a Great Depression.
• Some entire markets look very cheap. The Japanese Nikkei, already down over nearly two decades, has plunged yet again after a recent reasonable recovery, to the extent that a large number of its shares are trading at less than book value, which is something you very rarely see in the West these days. It could well be the “far too cheap” bargain of our young century.

Action plan

• If you’re a buying into stock markets for the long term, cheaper shares are good news, giving you an opportunity to load up at bargain prices.
• Read more on why I buy shares in bear markets.
• If you’re an investor via index trackers or ETFs (good for you!) some indexes have really fallen, such as the Nikkei in Japan or the FTSE in the UK. Think of it as getting 50% off in the sales, provided you planned to buy anyway and doing so fits your overall strategy.
• Naturally, shares could fall further. The gloomiest predictions are very gloomy. As ever, nobody really knows for sure – and if they did, they wouldn’t be telling.
• Drip feeding money into markets automatically via monthly savings helps smooth out the highs and the lows of investing, and takes our own faulty judgement out of the equation, which can be good for your long-term mental health as well as your net worth!

3. Get a pay rise, or start making cash on the side

At times of financial crisis, cash equals security as well as opportunity.

The US is probably already in recession. The rest of the world may follow. Nobody knows how hard or deep the economic hardship will be. For people losing their sub-prime homes, things are already very rough indeed. The truth is though that for most typical Monevator readers, the credit crisis hasn’t yet had too bad an impact outside of our portfolios, unless you happen to work in finance. The outlook could improve from here, or it could easily get a lot worse, fast.

Things are always uncertain during a financial crisis. You can kid yourself that you understand better than the millions of other people who are also guessing what’s coming next, or you can concentrate on being prepared for whatever happens.

What it means for us

• Having three to six months salary as cash savings to hand should be your first goal at all times, let alone when jobs may soon be lost and income dry up.
• For the wealthier or the previously prudent, extra cash on hand will give you the luxury of buying shares and corporate bonds at depressed prices.
• Regarding the current crisis, if credit really is being drained out of the financial system, those with savings will be rewarded again in the years ahead, after years which favouring debt.
• We’re already seeing this with higher interest rates on savings, and better mortgages for those with a larger deposit.
• Always beware the return of inflation.

Action plan

• Don’t look for cash when you’re desperate for it. Build your savings now, when you’re not.
• If you can see opportunities to earn more money or cut expenses, make hay while the sun is shining.
• If you’re employed, the mood in the office may be getting dark. Try not to be sucked into negative thinking. Turn it around – show your bosses how you’re making the company money, regardless of how remote your job is from the bottom line, and so explain why he or she needs to keep you on board if things get rough.
• If you can’t show how you make a company money, figure out what you need to do so that you can.
• Start earning money outside of work in your own time. Employ an unused talent, or do something you don’t enjoy but find very easy. Examples: Building furniture, teaching Spanish, completing tax returns, cutting down trees in gardens.
• If you’re self-employed, diversify. I’ve deliberately sought out new clients since Christmas, just in case any of my existing ones don’t make it.
• Ebay anything you own that you don’t want anymore or have no use for.
• Do all this before everyone else starts doing it, and be sure to save whatever cash you get.
• It’s been a long-time (nearly 20 years) since the US and UK suffered a bad recession. The above probably sounds very quaint if you don’t remember it. That’s okay, and my fingers are crossed as well.

If the wider economy doesn’t turn sour and the deep recession threat is averted, by all means buy yourself a treat with a portion of the extra emergency fund you saved. Then try and find something bad to say about me for urging you to prepare just in case. Toast my bad advice with champagne! I think you’ll find it hard to chastise me. ☺

4. Revisit your long-term goals

At times of financial crisis, we’re reminded how changeable the economic weather is.

With luck, most people reading this post will have (or have had) a long and happy life. Over that time you’ll encounter every kind of economic climate.

My oldest living relation (94!) grew up walking geese to market, lived through two World Wars, made do with ration books for several years, thought TV dinners were marvelous, never owned a car or learned to drive, and gleefully gives sweets to children who earn more from after school jobs than she gets in a week’s pension.

In just the last 15 years we’ve seen newly mobile Eastern Europeans and Central Americans flock to jobs in the West, the dotcom boom and bust, gold quadruple in price, inflation go down and stay down, China become the world’s factory and, latterly, widespread US property price falls for the first time in living memory.

What it means for us

• Nothing stays the same.
• Today’s No Money Down scheme is tomorrow’s No Mercy Repossession.
• If you believe we’ll never see inflation, mass unemployment, major stock market upheavels and ever more transformative technologies in the next few decades, you’re a braver man or woman than I.
• A good, balanced long-term financial plan transcends this day-to-day detail (coups, wars, or revolutions aside).

Action plan

• Commit to a goal of financial freedom, and get as close to it as you can.
• Read a good personal finance book, my modest eternally true 10 steps, and write yourself a plan.
• At the least, you want to know how much you can save each month, where to invest it, and whether to do so via a pension or some other form of tax efficient wrapper.
• Calculate what you need in order to retire from work, if you choose to. I favour targeting a monthly income, as opposed to a net worth figure, since the latter fluctuates so much with every market turn.
• If you do leave work, I’d suggest you try to stay exposed to the stock market as much as is consistent with your other goals, so you remain in tune with the changing fortunes of the global economy. You don’t want to retire on today’s salary, only to discover tomorrow that due to wage inflation you haven’t a hope of taking that All-Inclusive break to Mars. A high-yield portfolio of dividend paying shares is one way to find a balance between oscillating share prices and a relatively stable overall income.

In summary, don’t sell in a panic, earn more cash before the crisis spreads, consider buying when markets are down, and be sure to have a solid plan you believe in so you’re not flummoxed when this sort of economic wobble happens the next time.

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