Advice for Rough Times

Not to jump to conclusions, but those cracking sounds you hear outside the window are the bones of the nation's financial powerhouses being broken. Oh, what a mess their greed has gotten us into!

As I write this, the stock market is perilously close to the 20% decline that signals the onset of a bear market. The troubles of the financial sector are spreading like a cancer throughout the rest of the economy. We may muddle through and avoid a recession and a prolonged downward drift in stock prices -- I still think it's possible -- but then again, we may not. Given the uncertainties, now's the time to take a careful look at your own investments and personal finances. Here's a checklist to help you do so.

Your investments

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Don't quit saving for your retirement, for your kids' college expenses or for that second home you covet. The one nice thing about a bear market is that you're buying goods on sale. But do look at all your investments to be sure you are broadly diversified. A financially astute friend of mine just took 30% of her retirement savings out of stocks and put it into a money-market fund. She's ten years from retirement and focused on preserving capital. Good luck! The problem with getting out of stocks is knowing when to get back in. I've tried market timing, and I am lousy at it.

But money to meet your short-term needs -- those in the next couple of years -- shouldn't be invested in stocks. And if you're an active stock picker and trader, keep some dry gunpowder. My family's long-term savings are tucked inside about two dozen mutual funds. For the fun of it, I do all my stock picking inside a self-directed IRA, and that account is now 40% cash. If the market bounces back and does fine in the coming months, I'll do fine, too. If it doesn't, I will be a happy shopper down the line, picking up bargains.

Your balance sheet

Your family needs financial maneuverability in times like this. Is your job secure? Just in case, have at least half a year of living costs close at hand. For that purpose, I keep a substantial home-equity line of credit, untapped. It's a lifeline if I ever need it, and it costs nothing if I don't. Maybe you owe money on a bank checking-account overdraft or line of credit. Consider paying it off to make it free and clear. The same applies to credit-card debt. If you have any, put yourself on a spending diet for a few months and pay off the card that carries the highest interest rate.

Like me, you may be longing to buy that wide-screen, high-def TV to hang above the fireplace like the work of art that it is. Keep dreaming. I know President Bush wants you to take responsibility for the economy by spending money, but try not to make nonessential big-ticket purchases until the economy is out of the tank. Most likely, whatever it is you long for will be cheaper still down the road.

Your inner self

I'll probably move that self-directed IRA out of Merrill Lynch and into a discount brokerage -- my way of saying, "You people have screwed up and affected my life for the worse (and besides, your commissions are still too high)." Mother Merrill won't notice, but I'll feel better. Otherwise, I'm going to keep my perspective, and so should you. This is a great country. We've prospered mightily. The downside of the economic cycle is the price we pay for this success, and it keeps us honest by wiping out the excesses of the upside.

By and by, there will be another upside, another bull market, and I plan on being there to celebrate.