Financial Fear Factor: Four Fears About Falling Finances and How to Deal With Them
Edited Article and Commentary by Dr. Don Rose, Writer, Life Alert
Most agree that the current economy is bad, and likely to get worse before it gets better. However, what the media often overlooks in its �economic disaster coverage� is that the economy always gets better eventually. In other words, to quote a famous maxim, �this too shall pass.� Still, the question arises: what should we do until that �eventually� finally arrives? Many people develop anxiety about their falling financial statements and want to know what to do about their shrinking investments, or if any actions are even warranted.
To address these issues, this article presents four common fears associated with the bad economy, what actions to take (or not take), and ideas to expand your thinking about investments and market psychology in order to deal with such fears. I will try to put some perspective on the investment markets, something especially important for folks in the senior demographic, since they tend to have more investments and hence more to lose.
Note: this article does not cover home foreclosures. People in such dire situations need professional financial advice for their specific cases. The information below covers more general financial issues and fears related to the current recession, not special scenarios.
Fear #1: If I Don�t Sell Stocks Now, the Downturn Will Wipe Me Out
The stock market has had many downturns in the past, of varying durations, but they all have one thing in common: the market always came back up eventually. �Stay the course and ride out the downturn� is the simplest yet best advice to follow.
There are two cases when selling stocks or mutual fund shares in a downturn might be prudent: if you really need money right now and have no other way to get it, or (for individual stocks) if you decide that one or more companies no longer look as fundamentally sound as when you bought them and are hence unworthy of your money.
Of course, �holding on� may not be easy to do, especially when you see so many people dumping stocks, which may drive stock prices down even further. But be strong. Don�t sell just because everyone else is. In fact, don�t sell precisely because so many others are! This is an example of contrarian thinking, a mindset many successful investors swear by. Its main tenet: do the opposite of the masses. When everyone�s selling, you buy. Many fortunes are made this way. The herd is often wrong, since herds tend to form when large numbers of panicking people do the same irrational acts. Resist the temptation to join in.
Let�s take a closer look. When everyone is selling, prices are probably near their bottom, because once everyone has sold there are no more sellers and hence there is a vacuum in the supply of stock, so buying pressure forces prices up. While it�s impossible to know the exact low point to which prices will drop, it tends to be when fear is at its height. One maxim says to buy when large dire headlines appear on the covers of major magazines.
Note that this contrarian logic works in the other direction too. When everyone is buying (remember the mania of 1999 when every cabbie and waitress had a stock pick and articles said the Dow was going to 30,000?), it is probably time to sell. Contrarian thinking also works for other investment markets, like housing. In the middle of our current decade, when folks with little income bought mansions with no money down and everyone was a mortgage broker and talked about flipping homes fast, it was time to sell.
The bottom line here is to forget fear and, if you do anything, it�s usually best to do the opposite of the masses of �dumb� investors. Many are panicking, so you shouldn�t. Selling because of fear, rather than rational analysis, is always unwise. Down times are precisely when most financial experts advise adding to a portfolio; after all, the goal is to buy low and sell high, and in a downturn most prices are on sale. Some are much lower than before, often driven down below their true value. In other words, it is a �buying opportunity.� However, if you do buy, make sure to select companies that are strong and can weather a potentially prolonged downturn. Or, buy �no-load� (fee-free) mutual funds, since funds spread risk among many companies, and the fund manager is an expert who is focusing full-time on getting maximum returns. But whatever you do, don�t panic!
Fear #2: If Stock Prices Keep Falling, Firms I Own Will Start Failing
Although they differ by only one letter, there�s a big difference between failing and falling. Let�s take a look at this important yet often misunderstood distinction.
A company in today�s market may be in good shape, not failing by any means, perhaps even showing strong sales and/or profit, yet its stock price may still fall. This is the kind of company one should be adding to one�s portfolio during a downturn, which always turns around eventually. Strong downward trends can carry even the best stocks in that direction, but the good news is that these top stocks tend to be the first ones that shoot back up when the eventual recovery comes. Why not snap them up while they�re on sale?
However, if a company truly is failing, then sooner or later its stock price will begin falling. And during a downturn, it will probably be much sooner than later. Bad stocks (e.g., firms with subpar management, lousy fundamentals, tons of debt, low profit or even losses) may get a break when the trend is up, since a rising tide can lift all boats, but a down trend can be merciless on bad performers. If you sell anything, make it these losers.
In summary, the financial fundamentals of a company almost always determine long term success, not the economic climate. In most cases, only a truly failing company will suffer a permanently falling stock price, and a (short-term) falling stock price will not cause a good company to fail. Invest with fundamentals in mind, not the �herd mind�, and you will be more likely to invest in companies whose stock prices tend to go up. Your focus should be on the long run; while even the best companies can be dragged down during short-term downturns, these powerhouse performers always rebound over time.
Fear #3: I�m Losing Lots of Money Because My Home�s Value Has Plunged
No one enjoys seeing the market value of one�s home fall, and the faster it drops the more fear can build up inside its owner. In times of dropping prices and fearful markets, it�s helpful to recall all the financial factors and benefits associated with home ownership.
First, it�s important to remember that any decline in home value only becomes a loss when you sell. Just as with stocks, a home�s value may go up or down but you experience an actual gain or loss only after a sale. Just as in the stock market domain, history shows that the housing market always recovers eventually. One statistic I heard is that home values at the end of any ten year period are always higher (that is, take any ten year time interval in the past and the price of homes at the end will be higher than at the start). This makes sense to me. It is putting a tangible face on the maxim that markets always recover eventually (10 years being the �eventually� in this case). Of course, home price recovery after a downturn can be faster than 10 years. Another informal rule that gets repeated is to always hold a home for at least 5 years, the implication being that you are likely to be in profit territory after half a decade. The main point is that those who keep a long-term perspective on their investments (5 years, 10 years, or more) are likely to reap rewards.
Next, there are tax benefits to owning a home rather than renting. Most folks can deduct the monthly interest paid on a home mortgage. The amount of this tax savings, added up over one or more years, can help make up for any drop in one�s home value, especially when the time period in question is longer (that is, the longer you hold your home).
Third point: a home is not just an investment but also something you live in, an asset you use every day, as do family members you may have. We all must live somewhere, and for many, the benefits of owning a home (even factoring in a possibly lower price when you sell) outweigh those of a rented home. If you do lose money when you sell a home, which is unlikely if you hold it long enough, the amount of rent you would have paid during that time (money you can never get back) is often greater than any loss you had after selling that home. Plus, any such loss is mitigated by the mortgage interest you deducted on your taxes (that is, your home�s tax savings �gift� to you) during all those years you owned it.
In summary, you�re unlikely to suffer a net monetary loss if you hold onto your home for a long enough period of time. As with stocks, don�t panic. In particular, avoid selling an asset like your home when prices are likely to be at a low point in their natural cycle. You may feel bad right now, but you�ll feel worse when prices go back up, as they always do.
Fear #4: I�ll Have To Stop Buying Essential Goods and Services
Best advice: be very budget conscious during a downturn, and be honest with yourself.
List and evaluate every item you spend money on. Determine what�s needed and what�s wanted. The �wants� group is always larger than �needs�. Be honest; some �needs� may not be essential; they may be wants masquerading as needs. Whittle down your needs list to the true essentials. Performing this analysis can help you make sure your true needs are covered by the money you bring in, even if your income falls during the downturn.
Next: find ways to get essentials at cheaper prices or for free. Join free discount clubs and customer-loyalty groups (examples: Ralphs Rewards gives points for shopping that can be redeemed for savings vouchers, and airline frequent-flyer clubs let you get free flights over time). Shop at bulk/discount stores. Search for free coupons and deals on the Web (and, for tech-savvy folks, subscribe to RSS feeds to get the latest deals from discount websites). Use the Entertainment book (shop for lowest price online, then use its many deal coupons and web offers, giving you savings that add up to more than the book�s cost). Finally, trade with friends or at Craigslist.org (example: if X has free-item coupons he doesn�t want but Y does, and vice versa, a trade lets both get free items they want).
Since many economists say our current recession is the worst since the Great Depression, perhaps we should heed the advice of the man who presided over the nation during that rough period, Franklin D. Roosevelt, who said, �We have nothing to fear but fear itself.� In other words, the worst thing one can do is give in to fears, since doing so often leads to irrational decisions that can harm our financial health. Maintain a steady head, and your finances are likely to stay steady (or even grow) during and after the current downturn.
On the other hand, if you need money right away, such as for an emergency, you have every right to sell assets and get money out. Try to take out only what you need. Avoid selling when prices are depressed, since many good companies and funds are dragged down with the bad ones when a strong financial storm hits. The main thing to remember is to sell only when you have to, or if you feel an investment�s fundamentals warrant it.
Also, consider selling a few assets during market highs and setting that money aside for emergencies, in case that money is needed in downturns like we have today. This way, you are not forced to sell during recessions or other lower-price periods. In short, always strive to �buy-low-sell-high� (a profit plan) and avoid �buy-high-sell-low� (a poor plan).
Remember that there are two types of health for adults to care about: financial and physical. Even those who are blessed with good physical health as well as financial strength still face everyday risks, especially as we grow older. For example, seniors are more likely than younger adults to suffer a fall. To ensure one is protected at home against any type of emergency, a medical alert system like Life Alert is recommended.
Don Rose writes books, papers and articles on computers, the Internet, AI, science and technology, and issues related to seniors.
The Life Alert cost is small compared to the benefits it provides. The service can be a life saver, especially for those living alone. It is truly an essential need, during recessions and boom times alike. The small, ultralight medical alert pendant gives Life Alert members the ability to get immediate help 24/7 during an emergency, thus enabling seniors to keep on living in their own homes, rather than having to go through the pain and expense of selling their treasured memories and moving into retirement homes or other facilities.
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