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In any election, at every level, the basic issue presented to voters is, in some fashion, a question of whether to stay the course or make a change.
When the vote is between candidates, one (often the incumbent) is a proponent of staying the course, continuing things as they are, while the other candidate offers a change – a new list of priorities, a new way of doing things. When the vote concerns an issue (taxes, public funding, laws) the decision is still whether things should stay the way they are or be changed.
How you decide to vote depends on your perspective.Your Finanzen decision to stay the course or pursue change doesn’t really hinge on facts, but on how you interpret the facts.
Similarly, your financial decisions are really based on your financial perspective. And just like a voter, you must decide: should I stay the course or is it time to make a change?
A new direction?
Because of the ongoing economic crisis / turmoil / downturn / depression, many people are looking for fresh financial direction. They want someone to help them stop the losses – the loss in their retirement account or stock portfolio, the loss in their real estate values, the loss of their job.
The losses people have experienced are facts. But before you make another financial decision, you may want to first reconsider your financial perspectives. While a financial loss may be an indicator that some things need to change, the specific actions to correct the situation depend almost entirely on your financial philosophy.
In a segment of life that seems to be dominated by mathematical data, the idea of looking first at your “financial philosophy” – whatever that is – may sound a bit “out there”. For many, their overriding financial philosophy is pretty simple: “I don’t care much about the ideas; I just want to do whatever makes the pile of money bigger.” But because mathematical assessments can only be made about the past, you can’t make future decisions based solely on which decisions produced the biggest pile last year, or last week. Instead, you need a financial perspective that can interpret the events from the past in a way that gives some direction for the future.
Are the “incumbent” financial philosophies still valid?
Historically, the past three decades produced several significant trends that influenced conventional financial thinking. As a result of recent events, each of these developments, once thought to be almost a “sure thing,” is receiving skeptical scrutiny.
As values have plummeted in a manner not seen since the Great Depression, people are asking…
Is the stock market worth the risk? After three decades of trending upward in a steady, profitable course, it was common for financial observers to conclude that the financial markets offered the greatest opportunities for investment reward. And the expansion of the mutual fund industry meant even small investors could reap big-time profits.
However, the steep declines since the all-time highs in October 2007 have left many people reeling. Investors may have always known that returns aren’t guaranteed, they may have even experienced periodic short-term losses. But the majority of investors never expected to see 30% to 50% of their account values wiped out in one year. Very swiftly, planning for next year’s retirement became planning to keep on working, and hoping for enough time to recover from the losses.
As real estate values have declined, and foreclosures continue to glut the market, people are asking
Does it still make sense to “invest” in a personal residence? The realtor’s mantra is, “Your home is your greatest asset.” Buy in with as little down as possible; use the appreciated equity to keep trading up. It wasn’t unusual for a $5,000 down payment on a starter home to result in a $1 million mansion 10 years later. And if you didn’t use the equity to trade up to a larger residence, you could always open a home equity line of credit to tap your gains.
Every part of this scenario worked – until the economy slowed. Defaults and foreclosures started to pile up, and housing values started to level off, and then drop. In a flash all that equity vanished – poof! For some, the loss has turned them upside down – they owe more than the house is worth – and they face two choices, neither of them good. They can continue making mortgage payments, knowing it may be years before the payments result in any equity. Or they can simply walk away, taking a hit on their credit history and losing whatever they had invested.
As employment has become more tenuous, people are asking
Should I keep maximizing my qualified retirement plan? The conventional wisdom was “a path to a bountiful retirement was through maximum contributions in an employer’s 401(k)”. The tax deduction on deposits and the tax deferral on the earnings could make for some gigantic long-term compounding opportunities. With automatic withdrawals and loan provisions in many plans, it was easy to keep pouring in the maximum from each paycheck, and take some out for emergencies. And savvy investors didn’t have to accumulate years of service or wait until age 65 for a pension – retirement could happen on your timetable.
But a few things misfired. It turns out almost no one was a savvy investor – not the employee who asked his co-workers for advice or the professional money manager. And many of the outstanding loans became due in full when employment was terminated. For some who lost their jobs, their only financial resource was their retirement account, and many withdrawals resulted in income tax penalties.
As budgets get tighter, more people are asking
How much debt should I carry? Credit is the grease of commerce. It allows people to obtain things now and pay for them over time. The use of credit makes people homeowners – and business owners – sooner. For manufacturers and service providers, it boosts sales – of cars, computers, office equipment, travel, everything. Smart and industrious entrepreneurs have used credit as the springboard to turn great ideas into fabulous fortunes.
Of course, there’s also the recognition that your ability to borrow is dependent on your ability to repay. You can’t borrow indefinitely – at some point, you have to pay it back. Or you have to declare bankruptcy and start over. Right now, there’s a sense that many Americans have reached their credit limit.
And what about the “new” financial candidates?
As some of the incumbent financial philosophies have staggered, a host of options have emerged. Many of these ideas aren’t new, but circumstances have given them renewed relevance.
The fallout from the declining markets, rising unemployment and the credit crunch have resulted in greater government involvement in what once was considered the “private sector” of Americans’ financial lives.
There has been a massive infusion of government stimulus spending and bailout assistance from AIG and TARP to Chrysler and GM.
As the United States government takes a more direct role in “managing” the national economy, the short-term result appears to be increased government borrowing and higher deficits, along with greater government regulation over products, transactions and compensation.
The administration is actively seeking to restructure the tax code, offering incentives and/or credits to home and car buyers, re-evaluating the items such as beer and soda pop.
Government is also looking to reform the health care system, including a government-sponsored insurance alternative, and digitizing the medical record system.
Regardless of your political persuasion, these government initiatives represent potentially significant changes in the financial landscape – for businesses and individuals. As Jon Meacham and Evan Thomas put it in their cover article for the February 16, 2009 issue of Newsweek: “We Are All Socialists Now.” If that’s true, what impact will it have on your financial philosophy?
Is it time for a change? It depends
Is there a new economic paradigm? Have the losses and government intervention fundamentally changed the rules and strategies for prosperity? As was mentioned at the beginning of this article, how you vote depends on your perspective.
For some people, nothing has changed, even with all the apparent economic turmoil. A value investor probably still sees great opportunities in the stock market. A person looking for a home might find fantastic bargains among foreclosures. And a true free-market libertarian already felt the United States economy was essentially socialist – the only difference was the degree.
For others, the events of the past 18 months are forcing them to re-evaluate their approach to financial decisions. A June 2, 2009 Wall Street Journal article titled “Americans Get Even Thriftier as Fears Persist” begins with “Americans are saving more of their paychecks than at any time since February 1995.” “New Horizon, New Behavior,” a survey from Barclay’s Wealth released on June 15, 2009, reported that 68% of wealthy investors are staying out of the stock market – even though 88 percent believe there are profitable opportunities – because they can’t tolerate the risk of loss. As for the possibility of the United States becoming socialistic, a March 26, 2009 Washington Post article reported that many college graduates “now see the government as an employer of choice.”
So…Even though things have changed, you can still make a strong case for staying the course – or making a change. It all depends on the financial philosophy you use to interpret the events.
Times May Change, But Good Philosophies Are Timeless
It’s quite likely that many of the people who feel whip-sawed by the current economic shake-up are those who believed that financial conditions were static – what was happening now would continue in the future. They saw the stock and real estate markets always going up, their employment conditions stable, and their access to credit infinite. If so, that was a faulty interpretation.
Financial history is full of ups and downs. While the events of the past 18 months have been somewhat unusual in their severity, they are not uncommon; in fact, the peaks and valleys occur regularly.
One of the characteristics of a good financial philosophy is that it provides insight and direction to make it possible to thrive in all circumstances – not just the particular trends of the moment.
For example, people with a timeless financial philosophy
– Have guidelines for their participation in the stock market or other investment opportunities. This doesn’t mean the guidelines are guarantees. Rather, it means there is recognition (and preparation) for what can happen, both positive and negative.
– Understand the psychological value and true financial costs of home ownership. Besides price of the home and size of the mortgage, owning a home consists of other benefits and liabilities. There may be tax deductions to consider, as well as overhead costs like insurance and property taxes. Profitable home ownership takes all these issues into account.
– Know when borrowing can multiply their wealth – and when it should be avoided. Just like a home is more than the price and the mortgage, borrowing is more than the interest and length of term. It depends on whether the borrowing is for emergencies or wealth-building. And even those who are debt-free and not currently looking to borrow should be sure they have access to credit.
– Balance their retirement savings against emergency and liquidity needs. Much of the hype of qualified retirement plans was built on “Plan A” premises – where everything goes exactly as planned. But history shows there’s often a need for a Plan B.
If the events of the past 18 months have undone your Finanzen financial progress, now is a good time to evaluate whether you would be better served by an adjustment in your financial philosophy. Not only that, it might also be a good time to ask the same questions of the financial professionals you’ve asked to help you with your financial programs, and see if their financial philosophies are ones that work – and are in line with yours.
