You can feel it in the air. Long-awaited change is afoot. In the Northeast, the summer that almost wasn’t has finally arrived with a vengeance, just in time for “back to school.” And, although lagging job growth continues to inflict pain, the recession that wouldn’t end is finally showing signs of abating. And with it, a shift in national attitude that has been bubbling beneath the surface has begun to emerge. A couple I met with last week said it beautifully:
“We’re not saying we’re glad the recession happened, but the truth is, it was a timely wake-up call.” In other words, enough of the grieving over what’s been lost and what never should have been and whose fault it was. It’s time to accept what is, acknowledge whatever role each of us might have played, and, with the newfound wisdom gained through surviving this crisis, take action to improve from here.
But take care! In parallel to this positive shift are hints of backsliding to the old ways that helped get us into this mess. So I propose we kick off the school year with a plan for capturing the painful but important lessons the recession taught us. Some of these are principles that previous generations knew well, but that somehow were lost along the way. Others are the product of a new economic environment, and the trend toward a “post-safety net” world.
Gramma had it right…
Some of the old chestnuts have stayed around for a reason. They were sound advice in the past, and they’re sound advice now. “If it sounds too good to be true, it probably is.” “Trust but verify.” “Never invest in anything you don’t understand.” Yes, Bernie Madoff is the obvious case in point, but individuals ignoring these tenets get burned on a smaller scale all the time, as discussed in this Boston Globe article.
“Spend within your means,” Gramma might have said. But I also like the way this 20-something put it: “I’m actually finding power in not spending money these days.” Now that’s a shift! Not sure where to start? Read this tongue-in-cheek article, 20 Ways to Waste Your Money, from Kiplinger magazine. Next, in a twist on conventional wisdom, look not just at discretionary expenses but also at presumed fixed expenses, which often go unquestioned, as laid out in this article by noted financial journalist Jean Chatzky. Read “Your Money or Your Life,” an oldie-but-goodie whose message resonates more than ever. Visit the New Means Facebook page for lots more ideas. However you do it, aim to take advantage of The New Frugality while it’s still in vogue, and societal support for this lifestyle makes it easier.
“What goes up, must come down.” Or put another way: “Bubbles will burst. No exceptions.” The Dutch learned this from tulip mania long before Gramma was born, but somehow, we insist on learning it the hard way again and again.
This rule has a lesser known, but equally important, corollary: “What goes down, must come up.” OK, well, that one’s not guaranteed, but things do tend to run in cycles. If you keep this in mind the next time it looks like bad times will last forever, and you’re tempted to make important financial decisions based on that assumption, you will end up better off in the long run.
What Gramma probably never needed to know…
Not surprisingly, it never came up in conversation, but I doubt my Gramma knew anyone who owned stocks, bonds, or mutual funds. Back then, middle America simply didn’t go there, didn’t need to go there. Bank savings accounts were the order of the day. But with defined benefit pension plans being replaced by self-directed 401k plans and a growing need for personal assets to keep up with inflation as people fund their own, markedly longer, retirement periods, most of us are investors now, whether we want to be or not.
So while Gramma never had to try to assess her “risk tolerance,” today we absolutely need to get a handle on this if we’re to invest successfully (i.e. avoid buying high and selling low.) And now is a great time to do it. With the stock market going in a favorable direction, many of us have moved to the far side of panic, and cooler heads prevail. At the same time, the market is not so overheated that anyone’s fooled into thinking it’s an “all up all the time” proposition, and memories of wildly plunging markets are still fresh.
Before those memories fade, take an objective look back at what befell your portfolio over the last year, and how you reacted to it. Did you lose sleep? Sell everything? Sit tight? See it as an opportunity? Although it seems unlikely we’ll experience this kind of volatility in the near future (after an 80-year interval since the prior time), know that it can happen. At any time. And decide whether you’re willing and able to go through that again, or would prefer to trade off some expected return in exchange for less volatility. (Had enough of hot weather and want to dig deeper on this topic? Cool off with this article, a cross-country ski-themed discussion about determining your risk tolerance.)
Not even on Gramma’s radar screen …
Finally, one of the big lessons this economic crisis reinforced was an idea that first arose for me in the post-9/11 economic bust: “We’re all self-employed now.” Yes, some of us are officially self-employed, and projections show that more of you will be joining our ranks, whether on purpose or by accident. In the meantime, even if you have a full-time job, in many industries, you can’t be sure it will exist 2 years from now, let alone 5 or 10. The old job loyalty/stability contract is really broken for most workers, and that means a shift in financial planning strategy toward one that more closely resembles that of the self-employed.
In particular, it’s no longer safe to assume a steady income so, like self-employeds, W2 employees need to create their own safety nets to better weather the down periods. This means beefing up your Emergency Fund and holding more assets outside your tax-deferred retirement plan. Even if this means you pay a little more in income tax in any given year, being able to tap this savings — without taking a costly early withdrawal from your 401k –- will get you through the hard times with a lot less angst. Check out additional thoughts on how to planning like a self-employed in this blog post.
Internalizing these lessons and making them stick won’t be easy. Irrational exuberance will return. When the next bubble starts growing and looking like it will continue to do so forever, it will be hard to resist the urge to go along for the ride. Don’t be fooled. Uncertainty still rules; it always has and it always will. Plan accordingly. Your Gramma would be proud.