Financial moves for 2009: It's just child's play.
Lessons learned on the playground years ago can apply to managing money today.
Feeling discouraged, bewildered, or anxious about your financial future? If so, let me suggest a simple remedy: Close your eyes, take a deep breath, and imagine childhood days.
Back then, your only concern may have been who to sit with at lunch. Recess might have been your favorite class. You may be surprised to learn that the games you played during your childhood have given you the skills needed to survive in today's financial markets.
So let's look at some of the games you'll be playing in 2009:
Jump-rope – Remember trying to judge when to jump in – or, even more complicated, when there were double jump ropes? You will have a lot of opportunities to practice this same skill in 2009 as you react to quickly changing market dynamics.
Tip: Be an active investor. Develop the confidence to "jump in" and capture advantageous rates and values.
Pick-up sticks – This game required you to maneuver carefully to avoid moving more than your targeted stick. Remember that it was a multiple move strategy that gave you a win.
In rebalancing your portfolio in 2009, show the same sensitivity to market maneuvering. Create a staged reentry into the markets over a period of years and adopt a laddered approach for CDs. Understand that the federal government has become a larger-than-life player through its bailout mechanisms, distorting traditional risk/return relationships.
Tip: Rethink what is a "safe" investment. Treasuries and municipal bonds are trading at steep discounts and some long-term maturities pay less than short term.
Seesaw – The up-and-down sensation of a seesaw can be unpleasant, when a sudden unexpected jolt thrusts you suddenly high or drops you with a thud to the ground. Welcome to your 2008 investment experience – one that will probably carry into 2009, with rising unemployment, mounting state and local government deficits, and continued negative corporate earnings.
Tip: Be careful to not quickly judge a market bottom – an accelerated global meltdown may have delayed effects.
Merry-go-round – Spinning faster and faster, you must hang on tightly or possibly slide off and hurt yourself. This past year has been a dizzying ride, as you fight to protect your credit rating against an onslaught of bad economic events. Credit-scoring model changes may have hastened your credit demise. Two examples: Less frequent use of credit cards may result in reduced credit lines and a lower credit score; refinancing a mortgage may "ding" your credit score with each credit inquiry by a potential lender.
Tip: Check your credit profile at all three agencies at least twice a year. Argue aggressively to correct any mistakes. Print out your credit score to show to lenders before their added inquiries ding your credit reputation.
Dodgeball – You may have chosen to watch rather than play this rugged game. Players who moved too slowly risked being hit by a ball that they didn't see coming. Welcome to the housing market of 2008. Subprime losses snowballed rapidly into a flurry of foreclosures, and negative home equity is now a large concern. Were you able to dodge the housing hit?
Tip: Expect further reductions in housing values in 2009 and low single-digit appreciation in future years in even the most stable communities. Renting may be a better bet than buying.
Hopscotch – Always a favorite playground activity, players hopped from square to square, trying to maintain their balance while not landing off course or falling down.
Federal, state, and local governments are aggressively redrawing the tax hopscotch course. By expanding their individual boxes, they will increase revenues from vehicle, tobacco, sales, corporate/personal income, and estate taxes.
Tip: Create a comprehensive tax strategy in early 2009. Hire a tax-savvy financial adviser, accountant, or attorney to help reduce your tax exposure. Consider relocating to areas with lower tax environments.
Egg-and-spoon race – Often played at annual school games, you raced to the finish line while balancing an egg on a spoon. Many Americans discovered the reality of a cracke nest egg, losing over a third of their retirement fund values since the beginning of 2008. For more aggressive investors, concentrated in equities or hedge funds, their nest egg has figuratively splattered, leaving an empty shell.
Tip: Focus on capital preservation, not returns. Maximize employer contributions and take advantage of higher contribution limits if over age 50.