Strategies for the Current Economic Climate

Getting agreement among a group of people these days is probably more challenging than in recent memory. When it comes to the economy, however, virtually everyone concurs: This economic downturn is one of the toughest many of us have experienced in our lifetimes. The hopeful news is that, like all cycles, it will end. The question is how can you weather the storm and be in the best financial position when things begin to improve?

There are a number of key strategies that can make a significant difference as you plan for or re-evaluate your financial situation during these tumultuous times:

  1. Review Your Living Expenses: Categorize your outflow into three groups; 1) Survival, i.e. those like food, housing and health care that are essential; 2) Desired, which are discretionary lifestyle extras like entertainment and vacation; and 3) Legacy, which include gifts and inheritances to others. This prioritization will be valuable should your income decrease and as a basis to project your retirement needs.
  2. Consider Refinancing Your Mortgage: With mortgage rates near historic lows and some banks beginning to lend again, consider whether you could benefit from a refinance. Getting a lower interest rate could reduce your living expenses, thereby freeing up cash that could be used to reduce debt, increase savings, or just a little buffer to help make ends meet.
  3. Don’t Time the Market: While tempting, studies show that timing only accounts for 1.8% of total portfolio performance (adapted from Financial Analysts Journal). Another study by ICMA-RC ( showed that if you missed just 10 of the top performing days over the 20 year period (1/1/88-6/30/08) your portfolio would have underperformed by almost 5% per year! Remember, by the time you see performance it is usually too late.
  4. Re-Balance Your Portfolio: During any business cycle there are winners and losers. Make sure your investments are balanced and diversified according to your risk tolerance, timeframe, growth and cash flow needs.
  5. Be Skeptical of Doomsayers: Especially during tough times, prognosticators abound. Economics is a ‘soft’ science at best wherein even the brightest Nobel Laureates are wrong a significant percentage of the time. There is an old saying, “put 5 economists in a room and you’ll get 10 different opinions.”
  6. Seek Objective Professional Advice: Many blame Wall Street’s “sales” mentality for some of its economic woes. Just as surgeons don’t operate on family members themselves, it is good to have an outside opinion. Get advice from an independent Certified Financial Planner who has no bias from their employer’s proprietary products. A “client centric” model that focuses on your needs first and foremost, and integrates investments with the rest of your financial picture, may be the best road to success.
  7. Update Your Retirement Plan: Everyone can benefit from having a plan that can provide lifetime income and establishes the feasibility of their retirement goals. If you don’t have one, get one. If you have one, update it to see what adjustments may be needed. Remember, those who fail to plan, plan to fail.
  8. Consider Getting a Second Opinion: Just as in medicine, a qualified second opinion can never hurt even if you believe you have all your bases covered.
  9. Dollar Cost Average: If you have extra cash, consider investing a specific amount each month. If you are eligible for a 401K or other retirement plan through your employer, keep funding it. The DCA automatic process is a disciplined method that helps you buy fewer of the expensive shares and more of the lower priced shares as markets fluctuate. While no guarantee, it can over time mean a lower average cost and growth opportunity.
  10. Keep the Long Term Perspective: Despite what you may hear, we are no where near another Great Depression where unemployment exceeded 25% at its height (our current unemployment is just over 7% by comparison). The reality is we are at or near the trough of a business cycle that has been exacerbated by an extended period of economic growth. Just as when we were in the midst of the “good times” and no end seemed in sight, it is tempting to see the “tough times” as going on forever. The unprecedented, world wide government efforts to stimulate our economies will pay off and we will get through this.
  11. Remember the Pendulum Principal: Investor behavior is prone to excesses and deficiencies much the way a pendulum often over-swings its mark. One need only look at the current near zero or negative yields on Treasury Bills to realize that the flight to safety may be overdone. Just as we had the “Tech Bubble” and the “Real Estate Bubble”, we are likely in the midst of a “Panic Bubble”. Resist the temptation to “follow the herd” in making emotional decisions that you may regret later.

The irony is that people are not naturally wired for investment success; they typically sell low and buy high because of emotional reactions. Study after study cites this as the number one factor in explaining why individual investors chronically underperform the markets. It is another reason why it is critical to have an objective plan that can provide guidance during unnerving times.

Investors are reminded that dollar cost averaging (DCA) and diversification does not assure a profit and does not protect against loss in declining markets. Since DCA does involve continuous investments in securities regardless of fluctuating markets, investors should consider their willingness to continue purchases during market downturns.

Mitchell provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Financial Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years.

Inductees into the Advisor Hall of Fame have passed a rigorous screening, served a minimum of 15 years in the industry, acquired substantial assets under management, demonstrate superior client service, and have earned recognition from their peers and the broader community.

Kauffman’s articles have appeared in national publications, and he is often quoted in the media. He is an Instructor of Financial Planning and Investment Management at the University of California at Santa Barbara, Santa Barbara Community College, and Pasadena City College.

Mitchell E. Kauffman, MBA

Certified Financial Planner ™

Masters of Science in Financial Planning

(Mr. Kauffman is an independent Certified Financial Planner practicing for over 25 years.)

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