Keep COOL Through Tough Times
By Michael Kelly
Spring 2009
During economic downturns, the constant stream of advice from financial pundits flows even stronger than usual. With so many voices coming from every direction, investors may have a hard time separating helpful information from biased hype or "chicken little" scare tactics.
It leads one to wonder: What are the real experts doing with their own money in these turbulent times?
We set out to answer that question with a recent survey of our own financial planning group. USAA polled more than 50 Certified Financial Planner (TM) practitioners to ask how they were handling their own finances as one of the wackiest years on Wall Street came to a close. (All USAA planners work on a "fee-only" basis and do not earn commissions on clients' investments.)
The responses were mixed, but in general, planners were optimistic about the future while staying mindful of current economic challenges. More specifically, several important trends came to light that could help investors keep their own goals in perspective.
Open Season on Stocks
When asked the movie title that best represents their view of the current financial environment, the no. 1 pick of USAA planners was "Open Season." Two-thirds of the respondents have bought more stocks in the last few months, and some planners even called the down market "the opportunity of a lifetime."
Why the rosy outlook in the midst of a nationwide financial crisis?
"Many investors have taken big hits in this bear market, but there is an upside. When stocks drop like they have across the board, it's a great opportunity to buy at bargain prices," said USAA financial planner J.J. Montanaro. "It's like everything is on sale right now, and when the market recovers, investors who took advantage of the downturn will profit greatly.
Montanaro cautioned, however, that proper diversification and knowing your time horizon are as important as ever.
"The standard rules of investing still apply," he said."If you're close to retirement age, it's best to keep the bulk of your portfolio in traditionally low-risk assets."
Staying the Course
The survey also revealed that this year's financial roller coaster hasn't shaken the long-term plans of our advisors. Two out of three said they haven't changed their outlook on retirement, and only five percent have moved money out of stocks and bonds and into cash. Moreover, the majority of planners said they aren't checking their retirement accounts more often than they did last year.
Experienced investors know that history and time are on their side. The stock market has always experienced ups and downs, some declines worse than others, but in general it has risen steadily over many years. So the odds are good that a well-structured investment portfolio will recoup its losses and continue to increase in value over the long term.
"The message to investors is to stay involved and aware of your portfolio, but don't panic," said Montanaro. "Focus your energy on what you can control, not checking your account balance every day."
Playing It Safe
Aside from its effect on investing decisions, the economic crunch also is raising questions about regular household budgeting. Most USAA planners said they haven't changed their approach to daily money management in response to economic conditions. But those who have are focused on being prepared for surprises.
That includes cutting back spending on luxuries, such as eating out. And one in three planners said they spent less on holiday gifts, with the intent of keeping extra cash available for emergencies.
"At a time when many companies are struggling and laying off workers, it's even more important to keep a cash reserve to cover three to six months of expenses," said Montanaro.
Paying off debt is also a smart move in uncertain times. When asked what they would do if they won $1 million today, most planners said they would pay off their mortgage or other large debts.
Ultimately, every family has a unique set of financial circumstances. But the survey of USAA planners offers one lesson that fits any budget or portfolio: the financial pros base their decisions on facts and long-standing principles, not emotional reactions.
"The worst thing to do is to make big financial decisions based on emotion," said Montanaro. "That's why tough times like these are often the best times to get professional advice – for the objective opinion."
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Michael Kelly is executive director of USAA's military communications program and a retired Air Force public affairs officer with 25 years of service. USAA, a diversified financial services group of companies, is the leading provider of financial planning, insurance, investments and banking products to members of the U.S. military and their families. Named by BusinessWeek as No. 1 Customer Service Champ in 2007 and 2008, USAA provides highly competitive financial products to its 6.7 million members. For more information about USAA or to learn more about membership, visit usaa.com.