Tough Times for the Economy--How We're Coping
(written: 18 October 2008; revised 17 December 2008)

What a mess!! We find ourselves living through the worst economic environment since the 1930s. Financial institutions are disappearing either into bankruptcy or being swallowed up by others. The stock market falls hundreds of points in a single day, sometimes for several days in a row; and then rises an equal or greater amount the next. Investment accounts have lost 40-60% (or more) of their value in just a few months. The US government and the governments of many nations around the world are struggling to find solutions that will restore confidence in the financial markets. The future is cloudy at best.

Regardless of which candidate for president you supported, no matter what you think of the Federal bailout(s), if you're like most people I've talked to, your concern may be "what do I do now"? It's tough to watch your paper losses mount up, but hopefully that's all they are right now--paper losses. Unless you need to turn your stock, bonds or mutual funds into cash to pay expenses, my view is to sit tight! One of the cornerstones of a good financial plan is to have a cash reserve equal to 6 month's worth of expenses (a year or more, if you're retired). That way you can tap cash to meet your expenses and not have to "sell low".

The big unanswered question in all of this is: "Who's to blame?" The obvious answer is all the sub-prime lenders and all the idiots who created or invested in financial products they did not understand. But, I think the real answer is all the greedy people who chased higher and higher investment returns: the financial advisors, the big institutional investors, the hedge fund managers, yes, even the endowment fund managers of many of our colleges and universities. All of them should be taken out and shot for abdicating their fiduciary responsibilities to invest prudently and protect the value of their clients' portfolios. They weren't and still aren't satisfied with realizing the average market returns delivered by a mix of index mutual funds spread over a variety of asset classes. (In my little article Investments and Golf Clubs--It's All Marketing, I explain our investment strategy.) If there is one thing I learned from my short association with a financial manager, it was DON'T get greedy, and although we have not escaped unscathed from the debacle, our losses are in the 20-25% range, not the 40-60% and more that the so-called experts have "delivered" to their clients. Don't get me wrong, losing 20% isn't fun; but we can live with it and it's better than if we'd been greedier.

Like most of you, we did not anticipate the current market conditions, although in retrospect maybe we should have. We lived in Florida for 11 years and watched as speculation, cheap interest rates, and sub-prime mortgages drove the selling price of houses to unheard of levels. A year before we retired in 2006, I suggested we put our house on the market. Had we done so, and sold it like some of our neighbors did, we would have realized over 60% more for our house. The housing market looked to me like the "dot com" market did in the late 1990s. There would always be someone willing to buy your house for more than you did, with the idea that they would be able to do the same thing. This is known as "the greater fool theory" (there's always someone out there--the greater fool--who will pay more for your house than you did). Unfortunately we didn't act on that impulse, and both of us are fairly intuitive people. Don't ask me why, but something in the back of my head said, put the proceeds from the house sale in a cash account. (We actually split it between two cash accounts because of the insurance limits on individual accounts.) I keep tabs on the market every day, but only look at our portfolio position at the end of each week. It had been slowly, but steadily, losing value for a while and although I don't believe in market timing, I felt it was not the time to invest those proceeds. As it turned out I was right this time. The result is we have sufficient cash to ride out this storm, for several years if necessary.

The beauty of the stock market is that it has always come back and historically reaches levels higher than its previous high. The anticipation that the market will continue to grow over time justifies keeping a significant portion of your investment in equities and funds, with the remainder in bonds, CDs and/or cash. As you know, if you've read any of the articles on Rick's Retirement Home Page, my strategy is to follow the Coffee House Portfolio with one slight modification (splitting investments in bonds between the Vanguard Total Bond Index fund and Vanguard Inflation Protected Securities). I have read that one's investment in bonds should mirror one's age. So if you're 70, 70% of your non-cash investments should be in bonds and/or bond funds, and the remaining 30% in stocks and/or stock funds. A lesser percentage invested in equities as you grow older can shield you somewhat from the kind of market we've been experiencing lately.

OK, so what's our strategy? It hasn't changed. We believe we have a solid life plan and are sticking to it. The test of a good plan is how it holds up in bad times. We refuse to enter panic mode; we are not selling anything. We believe the current situation is temporary and that, even if it takes a year of two, we'll recover--just as we did after the dot com bomb. We ARE watching our expenses carefully, and not spending on anything we don't really need. Within walking distance of where we live in Columbia, there are 4 theater companies, all the USC sporting events we care to see, restaurants in all price ranges, etc. In short, we haven't really changed our life style much. (We have found Netflix to be a great alternative to the movies, especially since we were going almost once a week.)

We continue to be very happy with our choice to move to Columbia. Although we did not travel this year, we are considering an extended trip to Thailand, Australia and New Zealand next fall. We could be gone for 5 months. It all depends on the state of the US dollar. So far, it's doing better against both the Aussie and Kiwi dollars than it did when we were in Oz in 2006. We're keeping our fingers crossed.

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