Top Tips For Surviving Today's Financial Challenges

Today we begin a new series on tips for surviving the complex, fast changing world of finance that seems to be consuming so much of the world's attention these days. We invite you to join in providing useful thoughts to other readers by posting your tips and suggestions as comments to these articles.

We will be sharing two broad categories of tips with you, one focused on the practical, financial side of the challenges you might be facing and the other on the inner, more emotional challenges that arise.

Some of the tips we will be exploring:

On the Finance side:

* Avoid the temptation to time the market
o Pulling money out of your retirement accounts to be safe can wind up costing you big time
* Manage your asset allocations
o Avoid exposure to any one asset class and maintain a balanced portfolio
* If you don't understand it, don't invest in it
o You can wind up in big trouble if you don't know the business or investment vehicle you are investing in
* Live within your means
o Overextended credit can expose you to not only high interest rates, but lock you into an unending cycle of debt

On the Emotional side:
* Be wary of using terms like "crisis," "meltdown," "disaster," etc
o These terms tend to create emotional reactions (energy follows thought)
* Know the difference between who you are and your bank account
o Who you are is not defined by your bank account, house or job
* The universe rewards action, not thought
o You can think about it until the cows come home; results only follow action
* The stability myth
o Life is a process of growth and decay, but never stability - attempts at stability breed instability

Financial Impact: Market Timing Just Doesn't Work

You have probably heard advice against trying to be a market timer. What is "market timing?" Market timers are people who hope they can sell at the absolute highs and buy at the absolute lows. A financial advisor once suggested to me that for the average individual investor, trading your own account and trying to predict market moves is a bit like putting the average person on the street inside Yankee Stadium and asking them to hit a major league fast ball out of the park. Most would be lucky just to hit the ball at all!

On the practical side, if your 401 (k) has been slammed like just about everyone else's, about the worst thing you could do would be to panic and withdraw those funds. Why? Most people who are withdrawing their retirement funds are putting them in cash, or other "safe" places, not unlike the mattress. The problem is that you have to sell the underlying securities or mutual funds in order to move to cash. Clearly, those securities and mutual funds are selling at depressed prices right how.

If your plan is to buy back later, when things are better, you certainly will be able to do so. However, let's say you originally bought into your mutual fund at $100 per unit. It is now down roughly 35%, so you sell for $65, guaranteeing a loss of $35. Now you park it in cash somewhere, maybe earning 3-4%, and you wait for the market to turn.

By the time you buy back in, you may wind up paying, say, $85 for that same share you sold for $65. So, now you have lost the original $35, and you also missed the $20 upside move. That means you missed out on $55 of value!

Here's a related scenario: let's say you are someone who contributes monthly to your 401 (k), adding a little bit each month. You may be tempted to stop contributing, because you want your money to be "safe."

Why is this a bad idea? Well, if you are contributing each pay period right now, you are buying those mutual funds at "nicely" depressed prices. So what happens when they rebound? Those shares you bought at lower prices move up and become worth more - much more than you are going to make in a 3-4% cash return scenario.

Conventional wisdom and actual research show that the stock market provides better returns over time, typically 10 years or more. Several studies covering decades of history point out that the person who sold their holdings hoping to time their way back into the market and then wound up missing out on the best 10 days ended up with a portfolio worth about half what the person had who just sat tight.

If you can be patient, and follow the second piece of advice which follows, you will probably do much better than those who panic and make rash moves with their retirement accounts.

Emotional Impact: Be Wary of Fear Based Language .

The press is full of stories with lead lines about crashes, recessions, depressions, meltdowns, bubbles bursting, and panic. While there is no question that we are going through a period of big swings and those swings are likely to be with us for a while, you don't have to get caught up in the emotion of it and wind up becoming volatile yourself.

In fact, if you do let your emotions swing with the rise and fall of the markets, you may become part of the problem you are trying so hard to avoid. How is that?

The more you tell yourself that something is scary, the more some part of you listens and starts to produce scary feelings to go along with what you are telling yourself. Last week, I wrote about this with the notion that energy follows thought. The primary problem with negative feelings is that, well, you feel them. Right there in your stomach, or wherever your fear feelings show up.

Once you feel them, they become very real. If you keep reminding yourself that you are in the midst of a meltdown, financial crisis, etc, the feelings may become so strong that you just have to do something. The growing sense of panic may lead to the decision to exit the market, park your money somewhere "safe" and you then wind up becoming victim to your own choices to behave like a market timer. And, even if you are on the sidelines, you may still wind up feeling scared! And now you have the double whammy of probably missing upside moves as well as still being scared.

Please do comment on this post with tips of your own. We will be looking for other useful tips to develop in the days ahead. If you would rather email your tips, please send them to me at [e-mail].

***

You can find out more about Russell Bishop at http://www.lessonsinthekeyoflife.com. Contact Russell at: [e-mail].

The author of Lessons in the Key of Life, Russell is an Educational Psychologist, professional life coach and management consultant, based in Santa Barbara California.

Comments

[AshevilleVoice]

My top tips are:

-Research the banks in your area. Find a small bank or credit union with ties and lending history focused locally, and a good credit score. Many of them are offering superior service and interest rates. I moved to a local bank with a 5.2% interest checking account, FDIC insurance and an above average credit rating!

-If the idea of investing with a company that drains your IRA or 501K to pay multimillions in CEO pay while you lose out strikes you as repugnant, immoral, or fraudulent, consider whether staying in that company offends your own moral values. If the answer is yes, get out. We, the small investors, have an opportunity to forge new investment vehicles by voting with out money.

-Do not stay in and continue to pay into a system because it might rebound 10 years from now! In an inflationary spiral, your principle needs to grow with the cost of inflation just to break even.

-Google the term "yield trap".

-Consider the significance of the allegations of corruption in Wall Street institutions. Until enforceable regulations are in place, how likely is it that the corporate criminals are suddenly going to play fair and give small investors an honest share of their investment earnings?

[nezumi]

I'd add a third category.

On the social side.
* Take this crisis as a opportunity to get closer to others
o As many are hit by this crisis you have company. Build a base of good friends in misery. Discard those that only valued you because they profited from you.
* If you have always run with the herd continue to do so.
o There is a cost involved if you do not. Investors who see and avoid bubbles make less money in bubble times and their advice is. Investors who make money in crisis are viewed with suspicion. Running against the herd is only rewarded socially in hind sight.
* Take this crisis as a chance to convince others to make the world a better place.
o Money is not everything and if other values would receive as much attention, the world would certainly be a better place. This is helped by the destruction of wealth as it will will level some income differences. Also, in dire need it seems so much less important to really have thoses Nikes (if you were not born into poverty, that is).

[brewsedornge]

Its been proven time and again the fan ancial base rebounds, despite the greediness or because of it. This always inspite of what happens in the back country. The properly speaking concern in our financial turbulant world, the need to focus on the third emotional side outside in the open as we speak. Don't want this to turn to a money pit and the communist end up with more guilt then they already own.

[thatsitfortheother1]

Don't try to time the market.

Good advice for the little guy, perhaps. But some day traders can probably retire after properly timing the wild market swings of the last month.

[cylindar]

"live within your means" has no meaning anymore. No one really knows what their means are because of easily available credit. A lot of people don't really know how poor they really are because they have lived from one credit card payment to the next. This is going to be the biggest hit and worst part of the crisis that is hitting America. People are really going to be surprised at what is about to happento them. Record number of job losses, divorces, and crime will shock this nation into sensibility. It won't be easy.

[mlaiuppa]

The best advice is to relax, be patient and wait it out.

I looked at a graph of the market for over a century. When you look at the big picture, it always recovers. I'm not going to retire for at least 10 years. I'm doing nothing to my TSA. And in fact I just put $6,000 in to a ROTH that I will be contributing to every year until I retire. I don't really care what the market does because I know eventually it will go up. Even if it takes 10 years. Which it won't.

I can't do anything about the housing market. My home won't be foreclosed as I have a steady job and will have a secure pension. But I will keep my home well-maintained. I already recycle and garden. And I've reduced my commute. Perhaps people should concentrate on the things they can control instead of what they can't.

Take a deep breath. Have a nice, long bath. Bubbles optional.

[jeffh12]

Agreed, everyone acts like its the end of the world, ask yourself, has your life really changed all that much? We have all been through being laid off and usually you can rest assured it happened for the right reasons, usually a better opportunity opens up. Go about your life, worrying about something you really can't control is not healthy.

[BushEatsBeef]

There's a large segment of the population currently operating in fear mode for no reason other than the fact that the media is telling them to be afraid and they are obeying. I can usually recognize this in my clients, when they quote the current headlines and add nothing of their own to the conversation. My life has changed because I cannot sell my services to people who are afraid. The solution for me is to not become one of them, to simply reach out to more people. The minute I start believing that "we are in a recession, and it will be worse than any we've seen in decades and will take longer for us to recover and the sky is falling," I become paralyzed with unreasoning fear and then the "self-fulfilling prophecy" is set into motion. I become a doomed individual simply because I believe that I am doomed. I have no intention of letting that happen.

[chimpyissatan]

So there's lots of prospective advice for the sensible investor out there: keep your head, avoid debt, keep plugging money into that 401(k). To be frank, that's the easy advice. Yawn.

What I don't see is ANY advice for the poor bastards who got caught up into his mess. For whatever reason, there are many people swimming in credit card debt, people with underwater mortgages and no bankruptcy option. People are imprisoned by usurous debt. (Thanks for that, congress. Funny timing on that legislation, no?)

Besides shelters and overpasses, what's the best path forward for them?

[Eli Davidson - Huffpost Blogger]

Thank you for another wonderful post. I find your column a powerful reminder to mind my mind as well as my assets.

I see time and time again that energy follows thought.

[PT6]

The BEST THING TO DO is wait for NEW REGULATORS to be installed and NEW REGULATIONS!

This market is still as "UNFAIR" as it has been!

We must Restore Confidence and that Means the Bush Team must Go right after the Election!

[Pacojam]

You advise is good, unless the market goes down another 60% from here and takes 20 years at least to come back. Some very smart people are predicting a depression.

In the normal mindset, you are right.

We may be looking at a different animal. The market may continue to drop and drop and drop... and then trade sidways for years, as it did in the 30's.

It took the stock market until 1955 to again reach 1929 levels.

[oldfart1]

The amount of $$$$$ being pumped into the market through banks is unprecedented. As the Greeks said, you never step into the same stream twice.

Whatever else happens, the banks will get bigger, and the rich will get richer, even without Bush or McCain to help them.

Europe and the US have huge balance of payments deficits and debts, and this means that our currency will be worth less and less, so after the panic ends, there will be strong inflationary pressures, just like before.

With inflation, the mortgage losses will diminish, providing the unemployment does not take off.

Overall, the advice is great. One can live happily with less, providing you don't measure yourself by how much money you have. But everyone needs a job, and Obama understands that. McCain does not.

[OtayPanky]

I just LOVE tips.

Thank you SOOO much.

[XCITIZEN]

Here's a great tip:

Lentils are really cheap, and they cook up into a very hearty and filling soup - combine this with a few slices of day old whole grain bread...

[OtayPanky]

Here's another tip: Brushed Prince in the 7th at Belmont.

Don't thank me. I'm here to help.

OtayPanky
Life Coach Extraordinaire

[Dr. Judith Rich - Huffpost Blogger]

Hey Russell,

I always enjoy reading your columns and appreciate your wisdom and points of view. A few columns down on the Living page is my article this week called: From Worrier to Warrior: Making Friends With Fear. The suggestions I offer in that department as it fit right in with what you're saying here.

Also, how about we face up to the economic reality that is before us and call it what it is? We seem to be tip-toeing around what the NY Times and the Wall St. Journal have already named: d-e-p-r-e-­s-s-i-o-n. OK, I said it.

I don't think we need to shy away from using the word or give it power, but instead, let's take it on and look to see what creative possibilities open for life during hard times? How about we empower this word to motivate us to move through new doors of creativity?

Many of us were raised by parents who lived through the Great Depression. They made it because they were creative and resilient. Our generation has never faced anything even remotely equivalent to those times.

It's important that we take this "opportunity" to learn how to dig deep and find our own inner strength and resilience not be afraid to face the music. Depression? OK! The important thing is, now what? This is what I'll be addressing in future columns just down the block.

[Dr. Judith Rich - Huffpost Blogger]

Russell,

Sorry for the strange syntax in my earlier reply. A hazard of hasty editing!

[lewes17266]

Dr. Judith Rich writes all about survival and making the most of whatever comes your way. I love her essays.

[honestpolitician]

Buffet has a good point "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

http://politicaladattacks.blogspot.com/

[laocoon]

In a system where government is restricted to enforcing "free" market outcomes and property rights only -- you are just your bank account and nothing more. You are just what your labor can be sold for, or you are just the sum of your assets. that is what is so evil about modern conservatism. this is the society described poetically in Revelations. We are reduced to elements of commerce.

[tck29]

Don't bring the Bible into it...that's nonsense. You might as well quote Dianetics or Alice in Wonderland.

[DixieMelody]

So true.

The surest way to lose (intelligent) readers to a post is to include religious dogma.

[mgd2854]

Because the poster uses the Book of Revelations as an analogy he is bringing the Bible into it and it is nonsense? What is wrong with that? What the poster is saying is true despite your animosity toward religion.