Survival strategies: Recession-proof your life
The economy and the markets may be in for a hard fall. Here's how you and your family can land safely.
(Money Magazine) -- Falling home values, rising unemployment, declining confidence among consumers and businesses and, lately, a swooning stock market. We may or may not be entering an official recession (defined as two consecutive quarters of shrinking economic activity), but either way 2008 has gotten off to a scarier start than most anyone predicted.
To lower your anxiety level and devise your own coping strategies - all without resorting to prescription medications - read this special report. You'll not only learn how the economy and markets might perform if we're in a real downturn (Breathe. Remember that knowledge is the key to overcoming fear.), you'll also get timely advice on what to do about your finances, investments, job and home. The economy and the markets will bring what they bring. Keep reading and learn how to take it all in stride.
Recessions: Learn the facts
Spend too much time with CNBC or The Wall Street Journal these mornings and you'll be dreaming about breadlines and "The Grapes of Wrath" at night. Time for some perspective.
For the most part, the U.S. economy bounces back from hard times quickly. The downturn in the early 1990s is instructive. It had a similar starting point to the rocky period we're in. Then, as now, a financial shock related to the housing market caused problems. Then it was the collapse of the savings and loan industry.
Today it's the subprime crisis. The 1990-91 recession lasted eight months, and unemployment eventually peaked at 7.8% - not a staggering number but still more than 50% higher than the current rate. Home prices in the top 10 metropolitan areas fell 8.3% during the downturn and its aftermath. Today they're off 5% from their 2006 peak. Recovery in the 1990s was slow: It took until 1996 for housing to start rising again.
The stock market moved faster. It dropped 21% but bottomed out in three months. If we did enter a recession this past December, as many economists think, a replay of 1990-91 would mean further market declines now followed by a rebound later in the year. Not a terrible scenario. Unfortunately, it's not the only possibility.
At times a confluence of events sets a trap from which the economy can't easily escape. Pessimists see that possibility in a subprime-induced credit crunch. In the 1970s, the trap was stagflation, a combination of high inflation and low growth. The U.S. was already burdened by Vietnam War-related inflation when the Arab oil embargo sprung the snare. The economy jerked to a stop, but energy costs kept the inflation rate up and made recovery painfully hard to come by.
The 1973-75 recession lasted 16 months, about double the typical one. The Dow Jones industrial average fell 40% from its pre-recession high, or more than triple the decline we've seen since October's top. Unemployment peaked after the recession ended, at 9.1%.
Before you reach for the medicine cabinet, take comfort in some important then-vs.-now differences. The Fed, and the feds, today act earlier in a downturn. The Federal Reserve has cut interest rates 2.25 percentage points since August. And Congress is putting money in consumers' pockets through tax rebates. Even more important, notes David Wyss, chief economist at Standard & Poor's, is the absence of high inflation, the real standard-of-living killer. Energy prices notwithstanding, inflation remains mild. It ran at 11% in 1974 vs. 3% last year.
Bottom line: A debilitating recession seems unlikely, but that doesn't mean you should do nothing. Instead, set yourself up for the opportunities that will come if the downturn is short - and keep yourself safe should the hard times stick around.
Shore up your balance sheet
Stock up on emergency funds. A good rule of thumb for a two-income couple is to keep three months of expenses in a high-interest savings account or money-market fund in case one of you loses your job.
In a downturn, which makes a new job harder to find, you'll want six months put away, says planner Mark Brown of Denver's Brown & Tedstrom. That's especially true if you're in an industry likely to be hit hard by a recession (say, construction or financial services) or if you're a one-income family. If you're self-employed, Brown advises you to stash as much as a year of expenses. "Everyone needs a lifeboat of liquidity, especially now," says Brown.
Slim down the debts. Your best investment in hard times is to pay down credit-card and other high-interest debt. Ron Rogé, a planner in Bohemia, N.Y., says the way to do that is to cut discretionary spending - and start with big items. "This is the year to take one vacation, not two," says Rogé. In good times, people will defer paying off credit cards to invest more in stocks and real estate. But those investments could have low or no returns this year.
Savings accounts are safe, though yields will get stingier as interest rates fall. Rogé says it even makes sense to pull money out of an emergency fund to pay off debt. Psychologically, that's hard to do in a shaky economy. Chances are you won't lose your job, however, and if you do, why not run up debt then rather than pay finance charges now? If you want a security blanket, apply for a home-equity line of credit, which will probably have a lower rate than a credit card anyway. But tap it only in an emergency.
Shore up your portfolio
Regain your balance. If you had 10% of an otherwise S&P 500-like portfolio invested in energy stocks in 2003 and you never rebalanced, that stake would amount to 22% of your assets today. That's more than you want, especially after the big energy run-up and the possibility that demand will decline if the U.S. goes into recession. By rebalancing you'll be selling high and buying low, investing in assets that haven't done well recently.
Money's Michael Sivy recommends looking at topflight industrial, tech and consumer-staples companies that have gotten hammered, undeservedly so, in the early 2008 sell-off.
What should your balanced portfolio look like? Target-date funds, which set an allocation based on the year you plan to stop working, are a good guide. T. Rowe Price's target-date offerings are in the Money 70 list of recommended funds. The T. Rowe 2030 (TRRCX) fund - a sound choice if you're in your forties - has 64% of assets in U.S. stocks, 22% in overseas equities, 11% in bonds and the rest in cash.
Venture, carefully, beyond our shores. If you figure the U.S. is headed for a recession, you may be tempted to bulk up on international stocks. But now isn't the time to leap overseas without looking. Propelled by a falling dollar and strong economic growth abroad, non-U.S. stocks have delivered nearly twice the return of the U.S. market over the past five years. Those trends may be closer to the end than the beginning.
Yes, you should keep perhaps a quarter to a third of your equity holdings in foreign stocks. But don't get there all at once. Instead, invest a set amount each month in a broadly diversified fund like the Vanguard International Total Stock Market Index (VGTSX). That way, if overseas stocks pull back in the near term, your losses will be limited and you'll have the opportunity to pick up additional shares on the cheap.
Scared? Then embrace bonds. Do the market's gyrations have you wondering whether to sell stocks, go to cash and get back in later? Forget it. Trying to time an exit and a return to the market is doomed to fail. Instead of doing something foolish, do something cautious: Move more of your assets into bonds. A portfolio invested 60% in stocks and 40% in bonds fell 16% during the bear market that followed the pop of the tech bubble in 2000. That compares with a loss of 48% for an all-stock portfolio.
Over the long run, a conservative portfolio will return less than an aggressive one. But it'll almost certainly do better for you than an attempt to time the stock market.
Work harder and smarter
Get to your company's core. The best way to blunt a recession's impact on your family is to keep your job. How do you up the odds that you'll survive the cost cutting? For starters, make sure you're working on a project that's core to your company's mission. If not, volunteer for one. Not sure where your job falls? Hint: Mission No. 1 is profit. "Your company will look at who is generating revenue and who is an expense," says Nancy Collamer, founder of LayoffSurvivalGuide.com.
Get to the office and stay there. Cut back on the work-at-home routine, even if it means being less productive. If your boss doesn't see you much, it will be easier for him to decide not to see you at all. "Those who have a daily presence and are seen before and after regular hours will be the ones who stand out as indispensable," says outplacement expert John Challenger.
Cozy up to a headhunter. Having a recruiter on speed dial can be useful in a downturn. Leslie Stern, a partner in the financial recruiting practice at Heidrick & Struggles, says he's more likely to take your call if he met you at an alumni association event or through some other networking group. It shows you're connected.
Collamer's advice: When you meet a headhunter in such a setting, offer to help find candidates for searches. Again, you're clearly connected. And when an opening that fits you comes across the desk of a recruiter you've recently helped, your name will be top of mind.
Get ready for next time. Switching industries in a downturn isn't easy. But if job security is important to you and is lacking now, lay the groundwork for a shift to an area with better growth prospects. According to the U.S. Bureau of Labor Statistics, health care will be the fastest-growing field in the next decade, followed by professional services.
That doesn't mean you enroll in medical or business school. But a course or two that shows your interest in a new field will look good on your résumé. Search for a position in which your skills are transferable, but don't try to make too many moves at once. "Stick to jobs on the same level," says Jan Cannon, a Boston career counselor. "You probably won't be able to get a promotion and move industries at the same time." Security will be your reward.
Focus on the home front
Be a picky buyer... Bear markets create bargains not only in stocks but in houses. If you're shopping for a home now, you have a lot to choose from. Nationwide there are 3.9 million homes for sale, up a third from two years ago. And homes are taking longer to sell, so you can afford to look around for what you really want.
When you find it, offer 10% below asking price, suggests Barry Miller, a broker and owner of Buyers Only America Realty in Denver. Some of his clients are getting that much of a discount, he says. More likely, the seller will meet you in the middle. Corollary for owners: The key to selling your home is pricing. A recent study of New Jersey sales found that houses priced too high eventually sold for less than similar ones initially priced lower. So be realistic. List your home for an amount that's slightly less than what comparable houses sold for over the past few months.
...And a savvy borrower. Interest rates are coming down. So now is a good time to refinance. The biggest savings may come on jumbo mortgages above $417,000 if Congress, as expected, temporarily increases the size of mortgages that can be bought by government-sponsored Fannie Mae and Freddie Mac. Lower rates, in turn, should spur housing - and help soften whatever blows the economy will have to sustain in the months ahead.