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Making the Best of Hard Times

By James G. Mentzer D’99

This article represents the personal views of the author and should not be considered either professional tax or legal advice. If you have questions concerning your own situation, please consult a personal adviser.

“It was the best of times; it was the worst of times.”

Charles Dickens used these words to describe the eve of the French Revolution. They could just as easily, though, describe today’s financial turmoil.

Mentzer

The “worst of times” portion of today is pretty clear.

The recession of 2008 ran over investors like a freight train out of control. Market values sank to lows last seen in 2002 and consumer confidence plummeted. Where, then, is the “best of times” part? Many economists suggest that a recovery will begin by the second quarter of 2009, although expansion of financial markets will not reach pre-crisis levels until 2010. At the same time, experts like Warren Buffett believe that public fears about the long-term prosperity of American business in general make no sense at all. In a recent op-ed piece published in The New York Times, he pointed out that in the 20th century, the United States endured two world wars, the Great Depression, a dozen or more recessions, oil supply shocks, the 1919 flu epidemic, and the resignation of a disgraced president. Yet during this same time period the Dow-Jones Industrial Average rose from 66 points to 11,497.

In the midst of negative news, what should you be doing to safeguard your investment portfolio? First, I hope that you are not doing “nothing.” Prudent investors monitor their portfolios on a regular basis. At the same time, I hope you have not panicked and cashed out of the stock market. You will either never return or you will re-enter at a price point higher than right now. In other words, you will end up buying high and selling low — never a winning investment strategy.

Specifically, I would urge you to consider the following questions:

Can you tune out the noise? The Wall Street Journal offers a free website that provides an abundance of financial information without “end-of- times” sensationalism. Or consider the Bloomberg News Service, another excellent source of financial information. For assistance with personal investment decisions, consider Clark Howard’s website. For the concerned investor, this site offers a wealth of useful information on a wide variety of financial and consumer-related topics.

Have your investment parameters or needs changed? Is your investment timeline still long-term, requiring your investments to work on your behalf for more than seven years, or have you reached a point where thinking more short-term (less than seven years) makes sense? Only if changes have occurred in these areas do mid-term corrections to your investment portfolio make sense.

Do you still have confidence in your individual investment selections? Most of us employ a “buy and ignore” policy. Now is an ideal time to replace any underperforming or inappropriate investment choices in your portfolio. And if a particular funds manager is doing an excellent job during these trying times, now would be an excellent time to buy more.

What are your asset allocation parameters? A well-diversified investment portfolio is better equipped to weather downturns in the markets than a portfolio invested in only one major asset category. If your portfolio does not have a wide range of stocks, bonds, and cash positions, then now is the time to make changes in that direction.

How large is your cash reserve? Savvy investors keep an emergency fund equal to at least six months of living expenses so they will not have to withdraw from their investment portfolio for liquidity purposes during times of extreme market lows. In addition, consider stashing any assets that you expect to tap within the next five years into shorter-term fixed-income investments where fluctuations in your principal value are apt to be minor.

James G. Mentzer, CLU, ChFC, has been a financial planner since 1985. He is currently director of planned giving for the United Methodist Foundation of Raleigh, N.C.