The Star-Ledger Archive
COPYRIGHT © The Star-Ledger 2008
Date:
2008/09/21 Sunday Page: 001 Section: BUSINESS Edition: FINAL Size: 1355 words
Series: THE BIG MELTDOWN
Survival
skills
Here are some ways to avoid getting lost during rough economic times
By KARIN
PRICE MUELLER
STAR-LEDGER
STAFF
And on the seventh
day ... it was time to take an aspirin.
It is one week since devastation started pouring
in from Wall Street: Lehman Brothers, Merrill Lynch, AIG. Like a suspenseful horror flick, investors keep looking around the
next corner with foreboding in their eyes, peering into the darkness, waiting to be surprised by the next monstrous, bloodthirsty
creature.
Or a different kind of surprise
— like the one Friday, when the market surged on news of a sweeping rescue plan by the U.S. government.
Experts say it’s a start, but we’re not out of the woods yet,
because the hard work still lies ahead.
“Actions
this week were necessary to stabilize the markets,” says Michael Maye, a certified financial planner with MJM Financial
Advisors in Berkeley Heights. “As always, the devil is in the details, which obviously are still being worked out.”
Ultimately, the plan will affect every
facet of the market and the economy and that will eventually trickle down to you in ways big and small.
What might this week bring? If the events of the past seven days are a guide, it’s impossible
to say. But there are still strategies you can use to protect yourself and your wallet in these tough times.
1. STAY MARKETABLE
If you’re nervous
about the economy in general (and these days, who isn’t?) it would be prudent to keep yourself marketable, even if you
don’t think you’re immediately facing a job loss.
“Interview periodically, because you never know when something is going to happen,” says
Tom Orecchio, a CFP with Greenbaum and Orecchio in Old Tappan. “You’ll have a current résumé and
your interview skills will be sharp.”
While
you’re employed, you should develop relationships with headhunters or executive search firms, so it will be easy for
you to call them, even if the market is lean.
And
if you and your spouse are both employed by the same company, one of you may want to consider a move now. It’s bad enough
to lose one income. Losing two at the same time would be a huge setback.
2. LOOK HARD BEFORE YOU LEAP
If you’re considering a new job, do your
research and make sure the company is financially stable and not on the way to becoming the next Lehman Brothers. If you get
a killer job, what’s the use if you find out after you’ve started that they’re planning layoffs or worse,
says Jerry Lynch, a CFP with JFL Consulting in Fairfield.
“Always look and know what is available out there, keep on networking, but only leap if you are sure
the job is secure,” he says.
3.
REVIEW 401(K) LOANS
If you’ve taken a 401(k) loan, you could be in trouble should you lose or leave your
job. You would be required to pay back the loan immediately or it could be considered an early withdrawal, which would be
subject to ordinary income taxes and a 10 percent penalty.
If your job is at risk during this market uncertainty, prepare to pay the loan back, and fast. Consider taking
a home-equity line of credit to repay the 401(k), says Michael Gibney, a CFP with Highland Financial Advisors in Riverdale.
Your only other option — an ugly one —
is to simply not pay back the loan, but then you would owe the taxes and the 10 percent penalty.
4. RETIREE CONVERSION
Many workers who have lost their
jobs are opting for an earlier-than-planned retirement rather than hunt for another job.
If you’re surprised to find yourself in early retirement, it might
be wise to convert your traditional IRA into a Roth IRA. Why? The balance in your IRA is probably lower these days, thanks
to recent market declines, and if you’ve lost your job, your taxable income for the year will be lower than usual. That
means a conversion this year would come with a smaller tax bill.
If
you have an ample cash cushion, plus enough cash outside of the IRA to pay the taxes due on the conversion, this could be
a smart move, Maye says.
If you’ve saved a lot
in your employer’s 401(k) plan, you could roll your account to a traditional IRA, and then move that money into a Roth.
Talk to your tax preparer before you make the move, so you’ll know exactly what you’ll owe on the conversion.
5. INVESTIGATE YOUR INSURANCE
COMPANY
In the wake of the AIG mess, revisit your coverage and the health of your insurance company.
Examine your costs, your coverage and exactly who is guaranteeing the
policy. To check on your insurance company’s ratings, visit the websites of Standard & Poor’s Ratings Services
(standardandpoors.com) and A.M. Best (ambest.com).
“If
you’re not comfortable with what you find, you should go shopping across the board,” Orecchio says. “You
should review those and diversify your carriers, just the same as with your investments.”
6. DON’T GET SNOOKERED
Today’s market volatility
may be tempting you to look at annuities because they offer “guaranteed income” and they’re often sold as
“money you can’t outlive.”
Gibney
cautions you not to overreact to short-term market moves by making emotional decisions, especially if they are based on sales
tactics. He objects to claims that even if the stock market goes to zero, investors of these annuities would be paid a stream
of income.
“Granted, if faced with the collapse
of an AIG, another insurance company may honor the same guarantee as originally offered, but why subject yourself to the stress
and uncertainty involved with poor management of the insurer’s parent company?” he says “Further, some annuities
can be very expensive and contain back-end charges.”
Annuities
are right for some, but you shouldn’t jump in because you’re newly scared of the market.
7. RERUN YOUR RETIREMENT PROJECTIONS
This should be
done every year to ensure you’re on track to reach your long-term goals. Be realistic in the status of your plan. Those
who are considering retirement soon will feel market drops a lot harder and more often.
Asset values are a lot lower than they were 12 months ago — which
makes it a good time to see what kind of lifestyle your assets will afford you at retirement. The projections, obviously,
will be bleaker than a year ago, yet it will have a good chance of looking better in the future, says James Marchesi, a certified
financial planner with Summit Asset Management in Florham Park.
The
exercise should fuel a desire to look for ways to cut expenses, increase savings and investment. If you’re over 50,
look at the 401(k)/IRA catch-up provisions and re-examine your retirement expectations.
8. TAX LOSS HARVESTING
You can find something of a
silver lining in your account’s drop by taking a tax loss. If you have a large loss, consider selling the position now.
“Many people refuse to do this
because they anchor on what they originally paid, hoping for it to get back there,” Maye says. “Assuming the investment
made sense to your asset allocation, buy a similar investment — not identical, to avoid wash sale rules — to replace
it.”
This move gives you, in essence, the best
of both worlds. By making the sale and taking the loss, you’ll get up to a $3,000 tax loss that you can offset against
any gains. If your loss exceeds $3,000, you can carry over the loss to future tax years to offset future gains.
9. HAVE AVAILABLE CREDIT
Get a home-equity line of credit with the largest credit line
the bank will give you. This will give you money to tap in an emergency. Set this up now while you’re employed and earning
income. But don’t use it unless you absolutely need to.
‘‘If you need money because you are hurt or out of a job, no bank will ever lend you
a dollar,’’ Lynch says.
10.
GET EDUCATED
Use last week’s often head-scratching events to become better educated about your investments
and what this market means to other aspects of your financial life.
‘‘Perhaps, if you are a do-it-yourselfer, employ the help of an adviser to do an assessment
of how this market has affected your situation,’’ Gibney says. ‘‘Even if it is just a one-time event,
you’ll gain comfort from an objective point-of-view.’’
Build a strong foundation
While these are historic times, advisers say age-old strategies still hold true after the rest of the bad news
shakes out. To best protect yourself, don’t ignore these essential building blocks to a solid financial plan:
1. Keep a cash cushion: You should have three
to six months of living expenses in a safe, liquid account. Build that amount up (or start, if you haven’t already)
to give you an extra-large safety net.
2. Revisit your asset allocation: You need a solid understanding of what’s in your portfolio,
and if any area is over-allocated, it’s time to reconfigure.
3. Understand risk: Every portfolio has market risk — the risk of a decline
in prices — but risk can take many forms. Consider the industry the stock is in, along with the chance an overpriced
security might decline. You also need to know if your investments will keep pace with inflation.
4. Don’t review your investments every day:
Behavioral studies have shown investors feel the pain of losses much greater than the pleasure of gain from their
investments, Maye says.
5.
Keep it in perspective: There have been other bear markets before. The average tenure of a bear market is around
335 days, Marchesi says.
6.
Don’t predict: No one is consistently good at it. Sharp, quick upward spikes are inherent in bear markets.
Stay consistent with your process.
7.
Don’t take large bets: You’re risking your savings if you take big risks on individual companies, Orecchio
says. Bear Stearns was trading at more than $26 shortly before it sold for $2.
8. Limit employer stock: If something happens to your company,
you might lose your job and a huge part of your net worth on the same day.
9. Don’t market-time: Marchesi says after professionally
managing money for more than 20 years, he still can’t time the market, so the odds of someone doing it part time is
virtually impossible. “The tortoise always wins,” he says.
10. History is on your side: Over the past 50 years, there have been at least
12 bear markets with losses in excess of 15 percent, Orecchio says. Including these losses, stocks have returned over 10 percent
per year on average versus Treasury bills, which have returned just more than 5 percent per year.
