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Taking a Breath
No one thinks we are safely out of the economic woods yet. However, most experts feel that the economy seems to be showing signs of recovery and the market has pulled itself out of the frightening lows it fell to in March. This could be a good time for investors to take a breath and to evaluate where they are and what they learned as a result of the worst economic collapse since the Great Depression.
Look at both the facts and the feelings: What happened to your portfolio, and to your lifestyle? How did you feel about what was happening? Were you terrified? Nervous? Philosophical? And where do you go from here?
For investors, the experience was an often painful lesson in risk and reward. Financial planners, CPAs and other advisers long have been explaining to investors that, historically, those investments with the greatest potential reward carry the greatest potential risk. What many investors discovered recently is that they are a lot more comfortable with the reward part of that equation than with the risk part.
This is a good time to think about how you felt about the risk you had assumed in your portfolio. Some advisers report that their clients came to them in tears, unable to sleep at night and scared to open their statements. Everyone was worried, but if your worries began to dominate your life, you might want to consider whether you really are comfortable with the amount of risk in your portfolio. You might want to talk to your adviser about whether you need to adjust your allocation to give yourself more peace of mind.
This is also a good time to take a new look at:
- Your retirement. The money you have saved for retirement probably also took a hit. You might have to re-evaluate not just your investments, but also your plans. Consider whether you will need to work longer, or downsize your retirement expectations.
The downturn provided a painful lesson to many investors in how much they could really afford to lose. In the case of your retirement savings, consider how you can help to protect those savings. At the same time, though, remember that your retirement could extend for many years past the time you actually stop working.
- Your debt level. Experts agree that the major problem preceding the financial crisis was overleveraging, on the part of companies and of individuals. Consumers were tapping their home equity and their credit cards to live beyond their means. Look at how much debt you have and, if it is significant, come up with a plan to reduce it.
- Your general savings. One result of the crisis has been an increase in saving by Americans, and that is a good thing – at least in the long term. Most experts agree that before the fall, Americans were spending too much and not saving enough. As a result, they were left with little cushion when the value of their homes fell or when they lost their jobs. Make sure you have enough savings to protect you from another downturn; if you don’t, then find a way to increase what you save.
- Other savings and financial vehicles. What happened to your other financial concerns, such as college funds for your children or grandchildren, or charitable trusts? How have they fared during the downturn? This is a good time to take stock and, if necessary, consider ways to replace any losses.