The financial crisis and the sluggish recovery have landed some tough economic blows to your personal finances. But you're still standing -- and it's time to fight back.
(MONEY Magazine) -- It's been more than four years since the financial crisis first knocked you back on your heels. You've probably been on the defensive ever since, doing your best to deflect whatever punches the economy has thrown your way. Of course, the trick to any good rope-a-dope strategy is to sit back and let your opponent tire out before you unleash your own flurry of blows.
Get ready to go on the offensive. Your adversary -- the lousy economy that has battered your portfolio, home value, and net worth, not to mention your confidence -- continues to come at you but has clearly lost some of its sting.
The unemployment rate, while still high, has fallen from 10% in 2009 to 8.3%. Economic growth, while still slow, has accelerated from an annual pace of 0.4% a year ago to 2.8%. And while the Dow Jones industrial average is still roughly 10% below where it was before the financial panic began, it's approaching the 13,000 level again.
Smart strategies from top experts on how to manage your investments, real estate, career, safety net, and savings, follow. None of these moves will undo the effects of the downturn. But they will help set the stage for your financial comeback.
Move 1. Change your stance on stocks
Old strategy: When the economy cratered, investors reacted emotionally to the market in ways that simply didn't pay off.
Best move now: Rationally reassess how much risk you should be taking with stocks based on changes in your circumstances.
Why: While only 3% of people abandoned equities altogether in their 401(k)s during the financial crisis, investors didn't exactly behave all that rationally during the downturn.
The young, for instance, grew seriously fearful, with 18- to 30-year-olds stashing more of their portfolios in cash than even baby boomers. Fund investors yanked billions out of U.S. equities in 2009 and shifted that into fixed income, only to see bonds get trounced by stocks that year. And the few brave souls who went searching for big gains raced into foreign stocks in 2009 and 2010, just in time for overseas equities to tank last year.
The moral of this story: Instead of trying to course-correct in reaction to a storm, you're better off calmly replotting your plan.
How to land this punch: Start with a range of equity allocations that's appropriate for your age. Those 55 and up will want to keep from 40% to 65% of their portfolios in stocks, says Lew Altfest, a financial planner in New York City. Younger investors should shoot for a stake between 60% and 80%.
Now consider how your circumstances have changed since before 2008. Chances are, you have a much better sense of your job security. Financial planners refer to your future ability to generate income -- and the dependability of that income -- as your "human capital," which must be factored into your asset allocation.
For instance, the income security that tenured professors enjoy allows them to be aggressive when it comes to equities. Work for a European bank, though, where you're one Greek default away from losing your job, and you'll want to ratchet down your stock exposure to the lower end of your range. "If you don't know where your next dollar is coming from, you can't afford more risk," says Colorado Springs financial planner Allan Roth.
You have a better sense of your tolerance for risk as well. That can also help determine whether you should be at the upper or lower end of your range. So too should your target retirement date. If you've concluded that you'll have to work several years longer than expected to recoup your market losses, "you can press the upper end of your range because you have more time," Altfest says.
Move 2. Take a calculated risk: Buy tech stocks
Old strategy: Some investors played defense and hid behind Treasuries, not realizing how expensive this security blanket had become.
Best move now: Go on the offensive by betting on tech stocks, which are cheaper than they've been in recent memory.
Why: What was safe is now risky, and what was risky has become a whole lot safer. Before the downturn, 10-year Treasuries were paying you two and half times the yield of the S&P 500. Today they're shelling out less than stock dividends. Meanwhile Uncle Sam's balance sheet is in far worse shape -- remember last year's credit downgrade?
Tech stocks have also come a long way -- but for the better since the dotcom days. The sector has become an earnings driver. Tech profits grew 20% faster than the S&P 500's last year, and they're projected to outpace the broad market again in 2012, according to S&P Capital IQ. At the same time, tech trades at nearly the same price/earnings ratio as the S&P 500, a far cry from a decade ago.
What's more, many companies in this sector also exhibit the kind of steady-Eddie characteristics that are valuable in tough times. "Tech can do well on its own," says Alex Motola, a Thornburg funds adviser. Businesses, for example, have to upgrade software or buy data storage, regardless of what's going on in the economy, to maintain and boost their productivity.
How to land this punch: Start by taking profits from your gains in government bonds last year -- Treasuries maturing in 10 years or more returned a whopping 30%. Next, trim that stake by an additional 5% to 10% -- Uncle Sam's debt now makes up more than a third of the total bond market, but financial planners recommend cutting back. Prior to the crisis, Treasuries made up only 25% of the bond market, so shoot for that target.
Use that money to boost your stake in tech. The typical domestic-stock fund that isn't a tech sector portfolio keeps about 18% of its assets in this group. Yet tech makes up nearly 20% of the broad market, and many market strategists say you can safely boost your stake to around 25% of your equities.
Blue-chip tech stocks aren't simply generating steady sales growth, they're also paying out dependable dividends. Motola likes Microsoft (MSFT, Fortune 500), yielding 2.7%. More than 80% of the software giant's sales are to cash-rich corporations, not consumers, and the company's earnings are forecast to grow more than 9% annually for the next five years. Plus, with a P/E of 11.2, based on trailing 12-month earnings, the stock is trading at a 20% discount to the S&P 500. Another good bet is IBM (IBM, Fortune 500), with a projected earnings growth rate of around 11% and a modest P/E of 14.4.
Prefer a diversified fund? Check out Vanguard Information Technology (VGT), which owns more than 400 stocks and counts Microsoft and IBM among its top holdings. VGT charges rock-bottom fees of just 0.19% of assets.
Move 3. Your 401(k): Max it out right now
Old strategy: Maintain your contribution rate so as not to fall behind. Of course, by failing to boost their 401(k) savings, investors did fall behind as the market failed to deliver.
Best move now: Max out your 401(k) quickly -- you're running out of time, and your scorecard shows you're behind on points.
Why: If you've learned anything from this downturn, it's that you can't depend on stocks to turbocharge your retirement savings. The S&P 500 index lost ground on an inflation-adjusted basis over the past four years, just as it did in the 2000s thanks in part to two severe recessions. "The economy isn't exactly rewarding you," says New York City financial planner Gary Schatsky.
So what seems like good news -- the fact that the average worker has maintained the same 401(k) contribution rate of around 7% of pay that he had in 2007 -- actually isn't.
How to land this punch: Salaries are expected to rise 3%, on average, this year. Start there. Shift that amount into your 401(k). Assuming you were saving 7%, that brings your savings rate to 10%. You may not feel that you can do more, but test yourself.
"Raise your contributions to a level that might feel uncomfortable," says Chicago financial planner Chris Long, adding that you can always change your mind later.
Try this: Every three months boost your contribution by one point. Keep it up and your savings rate will hit 15% by the summer of 2013. Depending on your pay, that could max you out (the annual federal limit was raised this year to $17,000, though workers 50 and older can put in $5,500 more). If not, keep going and you'll reach 17% by the end of next year. Now, 17% isn't exactly a round number, but if you include a typical employer match of 3%, it will bring your overall savings rate to 20%, a good target to aim for.
Why? If you're 45, earn $100,000, saved $300,000 and are socking away 10% of your pay, the chances your nest egg could survive until you're 95 would be just 56%, according to T. Rowe Price's retirement calculator. Boost your savings rate to 20%, though, and your chances of success shoot up to 76%.
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