Markets
7 Ways Your Money Will Never Be the Same
Don't expect the economy to "get back on track." It's a new track, folks, and here's how to navigate it.
By Jeffrey R. Kosnett, Senior Editor, Kiplinger's Personal Finance
June 4, 2009
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There's a whiff of economic recovery in the air, and investors have been feeling frisky as of late. Just another bout of irrational exuberance, you ask, to be followed by another bust?
One thing that's certain, however, is that the Great Recession, the credit crisis and the past year's meltdown in financial markets will change how you handle your finances. In many ways, your money will never be the same.
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1. Investments: Less risk
In the old days -- before 2008, that is -- an aggressive portfolio had 80% or more of its assets in stocks. No matter how well you're doing now or how well you or others think stocks will do in the years ahead, investors are so shell-shocked from their bear-market losses that it will be a long time before they will be confident enough to justify that high a proportion of stocks within their total portfolio.
The new normal for an aggressive investor, for example, may be just 60% or 70% in stocks, and someone who accepts only moderate risks may be comfortable with 40% or 50%. That may not be the right way to go -- barring a catastrophe, we think stocks will outpace bonds, and handily at times -- over the next ten to 20 years. But that's the reality when a generation of investors takes such a shellacking.
2. Markets: Greater volatility
Daily, hourly and even minute-to-minute swings will continue to be wild and sometimes vicious. Experts blame the heightened volatility on the ceaseless flow of information, or misinformation, which encourages misguided trading.
One blatant example: On April 19 a crank posted a Web "newscast" claiming that he had possession of a leaked government report saying that 16 of the country's top 19 banks would be exposed as dead when the Treasury Department released the results of its stress tests a few days later. Standard & Poor's 500-stock index promptly fell 4.3% the next day, even though Treasury discredited both the post and the source.
Enormous volumes in trading-oriented products, particularly exchange-traded funds, exacerbate the volatility. That's especially true early and late in the trading day.
How to cope? Keep your eye on the long-term prize and don't get caught up in day-to-day, or minute-to-minute nuttiness. Plus, "Don't trade in the first or the last hour, or you'll get whipsawed," says Tim Kober, of Cedar Financial Advisors in Portland, Ore.
3. Diversification: More choices
The recent market unpleasantness tarnished the concept of diversification; nothing worked well save cash and Treasury securities. So much for the traditional advice to keep fairly equal holdings in various stock categories -- such as growth and value, small-company and large-company, foreign and domestic -- and to own different kinds of bonds, including super-safe Treasuries, municipals, corporates and so on.
The new plan is to add a variety of investments, some of which might be considered highly risky, that really have a chance to zig when the ordinary stuff zags.
That could mean putting a greater amount of your money into such things as gold, foreign currencies, real estate, energy and other commodities (see Low-Risk Commodities Investing). "Defense is not just diversification by allocation. It also means keeping defensive funds in the mix," says investment adviser Dennis Stearns, of Greensboro, N.C.
For instance, you may want to look into a fund such as Pimco Unconstrained Bond (symbol PUBDX). Launched in June 2008 by the pre-eminent bond manager in the U.S., the fund invests in any part of the bond market without any sector limitation. Year-to-date through June 2, the fund gained 5.7%.
In the same vein, you'll see a push to introduce new products aimed at immunizing you from wrongheaded forecasting or missed trading signals. The new buzzword will be "buckets," or places where you store built-up savings to shield them from untimely losses. Some examples: annuities and insurance polices designed to lock in gains; easy-to-purchase packages of laddered certificates of deposit; and, in general, more passive-type investments with guaranteed floors and plenty of liquidity.
Reader Comments (6)
Posted by: Parag at 06/04/2009 10:37:19 AM
I agree on the point made on lower equity allocations in aggresive portfolios. In India, the Government recently launched a universal pension scheme for all its citizens called 'NPS' and in its most aggressive scheme, it, too, capped equity investments at 50% - even if your retirement is 30 years away!
Posted by: Rich Steiner at 06/04/2009 03:34:27 PM
The equity mix has sure changed for us. After being battered 20% we sold 80% of our stocks and for the first time in our lives went to 5 year,5% CD's. Not much but insured and they will not go backwords. Shouls have doen this years ago as we approach 70 and have always before believed in a 50/50 equity portfolio with real estate half and stocks half. The real estate is a disaster and unlikely in our opinion to come back in the next ten years.
Posted by: danielamartin at 06/05/2009 04:36:58 PM
For anyone with a ten year or less retirement horizon, stocks are a bad idea, as are bonds. Both will be flat due to the stagflation that our present administration is engendering with its massive deficit spending and funny money printing press. When inflation kicks in, safe money market returns will spike along with interest rates, and returns will rival or beat out stocks for some years to come.
Posted by: Charles Stoffers at 06/05/2009 10:32:54 PM
Just as generals are always said to be ready to fight the last war, investors will continue to believe that the recent past represents the future performance of investments. As the administration inflates the currency, returns on bonds, including treasuries, could reflect the negative net returns of the late 1970's. A return to the stagflation years can still offer superior returns if the opportune sectors are chosen.
Posted by: Mark at 07/27/2009 04:55:40 PM
I'm now nearly 100% in equities. We've just come through the "lost decade" for stocks. In 1982,one of the widely read financial magazines declared that stocks were dead. That was right before the biggest bull market in history. Stocks move in long-term cycles of 14 - 16 years. They get ridiculously expensive then they go through a long painful period of horrible returns and then they become ridiculously cheap and the cycle repeats. We could have several more years before the next major bull market but I'm dollar cost averaging in now. Can you imagine how much money was made by investors who dollar cost averaged all during the dismal 1970s and into the deep recession of the early 1980s. Those investors saw their portfolios grow many times over. Can I time the market? Of course not. But I want to make sure I'm all in when the next bull phase takes place, whenever that might be. The losses in my mutual funds were horrific at the end of 2008 but they have recovered over half since the rally started in March. Investors, like generals, do fight the last war.
Posted by: Graham at 10/10/2009 11:52:08 AM
Money hasn't changed, and you know it. It has, and always will be the exact same thing it always was. The only thing that changes is whatever the media spins on us. Less risk? Everyone is facing far MORE risk than ever before. How many people have money in banks in one fund or another? Lots. And our behaviour with money is exactly the same, too. We conserve when times are tough, and when things get better we will lavish our money on the things we want and need every day.