Your Pressing Financial Questions Answered |
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By: Rob Jupille Posted: 2008-11-03 05:15:23 |
| It seems that every time you turn on the TV or the radio, or you read the newspaper, there's more bad news about the economy and the financial markets. Over the past few weeks, I've fielded emails and phone calls from clients, friends (not necessarily mutually exclusive, by the way) and our e-zine readers asking about our take on the current financial crisis. So, as a subscriber to our e-zine, I thought I'd share with you the concerns of others as well as my answers to their questions. In no particular order, here are some of the questions I've received over the past few weeks.Why Should My Tax Dollars Bail out the 'Fat Cats' on Wall Street?Because those 'fat cats' keep our economy running. A little less than a month ago, matters came to a head and there was the real possibility that the worldwide credit markets would essentially lock up and cease to function. Why should that concern the average American? Because, like it or not, the global economy now relies on the free flow of credit to keep functioning. Banks operate on a simple principle. They use your short term deposits and other short term loans (credit) to loan out money to longer-term borrowers (think mortgages) and earn money on the difference between their borrowing costs and what they charge their borrowers. Because they must maintain certain capital requirements, banks often borrow short-term money from other banks so they can lend it out at higher rates, for longer terms, to home buyers and businesses. When banks stop lending to each other, as they did the week before last, the credit markets potentially 'freeze'. Home sales are stopped. Construction slows to a crawl. Business lines of credit are either denied or frozen. Payrolls can't be met and the domino effect starts. Ultimately, the short-term costs of the bailout pale in comparison to the costs of doing nothing.Are We Entering Another Great Depression?I would argue that, given current Government interventions, we are NOT on the verge of another Great Depression. The goal of the recent Federal Reserve intervention, bailout legislation and coordinated worldwide response to this crisis indicate that we learned a great deal from both the Great Depression and the Japanese financial crisis of the late 1980's. Governments have been much more proactive in identifying and responding to this current financial crisis and, while it will undoubtedly entail some pain, the hope is that we will avoid catastrophe and that this crisis will be short-lived. What Should I Do With My 401(k) or IRA?That's a loaded question. You open your quarterly statement and it's down (again). Although it sounds evasive, the correct answer is 'it depends.' No matter where you are in your life, the first thing you should do is review your accounts to be sure they're still allocated correctly. This market has hit some types of investments harder than others. If you haven't checked your asset allocation recently, call your financial advisor to do a review.If you're within a couple of years of retirement, you should already have your portfolio allocated so that you've got 18 months to 2 years of withdrawals already in cash. That way, when you do decide to retire, you don't need to worry whether or not you've got to liquidate positions in a down market. If your advisor hasn't given you that advice, it's time to make a switch.If you're young, understand that, if you are putting money in regularly to your 401(k), you're buying more shares at a lower price and, over the long time frame you have, you will ultimately be successful.The key is that, at each phase in your life, you need to review your portfolio to ensure that it's appropriate to your current circumstance.Is Now A Good Time To Buy Real Estate?We get this question a lot. If you're asking whether we're at a bottom in the real estate market then I'll repeat what I tell everybody that asks me that question. 'If I knew what ANY market was going to do in the short term, I'd already be retired on my 300 foot yacht anchored off some tropical island sipping Mai Tais and I wouldn't be sharing my secrets.' There's no doubt that the real estate market in most areas still has a ways to go before we reach bottom. That being said, if you find a house that you LOVE, that you'll be in for a number years, and that YOU CAN AFFORD, then by all means buy now. This market may drop further, but over time you will have lived in a place you love and ultimately done well for yourself financially.How Do I Get Through This Crisis?Being somebody that has played sports his whole life, my response is to counsel my clients to pay attention to 'basic blocking and tackling.' What does that mean to non-sports types? It means that, at all times, but particularly in times of financial instability, the basic building blocks of financial success become more important. What are those building blocks?· Live within your means. If you had to continually bank on your home equity to survive, you need to adjust your spending so you can live on the paychecks you're bringing in.· Build a cash cushion. Life has a bad habit of intruding on our best plans. You should strive to maintain three (3) to six (6) months of living expenses in cash to be able to ride out times of instability.· Make sure your portfolio is allocated correctly. If we learned anything from the dotcom bust, it's that well allocated portfolios won't get you a home run but in the long term they will serve you incredibly well.· For those of you that read science fiction (yes I'm a closet geek), the Hitchhiker's Guide to the Galaxy has the best advice ever right on its cover ... 'Don't Panic.' This crisis will also pass, our financial system will survive and history has shown that America will continue to prosper. This is a short-term blip in the grand scheme of things.A final word of advice. It's becoming readily apparent that we are in the midst of a historical financial situation. It may well shape how we view finances for years to come and, although it's stressful, I encourage all of you to take a moment to register your thoughts as we're going through it so that future generations might learn something from what we went through. |
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