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Sunday, 16 March 2008

Five Rules for Thriving in a Bad Economy

by Leslie Haggin Geary

The news is grim. Housing values are dropping, subprime mortgage meltdowns are spreading, the stock market's uncertain and the overall economy seems to be heading into a recession.

No wonder plenty of us are worried.

Still, you can protect yourself. Here are some experts' top five must-make strategies to do your best now that the economy is likely in for a choppy ride.

Rule No. 1: Don't panic
The stock market's gyrations can give even the hardiest investors a case of the jitters.

However, converting all your investments to cash is likely to cause you far more harm than good, says Joe Baker, CFP and president of Alcus Financial Group in Mount Pleasant, S.C.

"People are scared," he says. "They're asking, 'Is the economy crashing? Should I move my 401(k) to a money market?'"

Baker answers: "Please do not, unless you need the cash tomorrow. You'd be making a huge mistake."

Unless you need the money short-term -- say, within two years -- it's best to remind yourself that good and bad times pass. Historically, the market's made up all its losses fairly quickly.

Since 1945, there have been 11 recessions as officially defined by the National Bureau of Economic Research. The S&P 500 -- the index of widely held stocks used as a barometer for the overall market -- generally has hit bottom six months into the typical 10-month-long recession, according to Sam Stovall, chief investment strategist at Standard & Poor's.

After that point, the market typically starts regaining its footing. If you include the very worst meltdowns, when the S&P 500 lost more than 45 percent of its value, it took 19 months for investors to recoup their losses. But exclude the mega losses, and you find that it's actually taken just eight months on average for the index to bounce back.

"The reason the market peaks before recessions start on average and troughs before they're finished is that investors are anticipators," says Stovall. They're willing to become more optimistic once the bad news is out," says Stovall.

Stovall's advice to today's worrywarts is direct: "Don't freak out."

Rule No. 2: Bullet-proof your portfolio
Sure, we all know the warnings about putting all our eggs in one basket. But when it comes to investing, too few heed this advice.

One study by Hewitt Associates, for example, found that three out of five workers participating in a 401(k) plan never rebalanced their portfolios over a four-year period from 2000 to 2004. Failing to rebalance causes your portfolio to skew over time, leaving you overloaded with one kind of asset while owning too little of something else.
If you've neglected your assets, such imbalance could put you at greater risk.

Recent drops have left many investors in a position where they need more equities and less fixed-income. That may come as a shock for safety-hungry investors who are eager to stock up on fixed-income, cash and other "safe" assets.

"If your asset allocation was good for you six months ago, it should be good for you today," says Ellen Rinaldi, executive director of investment planning and research at Vanguard. "The fact that the market is volatile should remind you to be appropriately diversified."

Personal factors like your age and risk tolerance -- not the current state of the economy -- should drive your investing. For example, workers in their 20s and 30s should generally devote roughly 80 percent to 90 percent of their assets in equities while people in their 60s approaching retirement may devote up to 50 percent of their assets to stocks.

"Use market declines as opportunities to add to holdings," says Stovall.

Remember, it's a misstep to put your faith in gold, commodities or any other particular asset that seems popular now that the stock market is roiling.

"If you liked the market four months ago, it's at a 15 percent discount," says Brett Horowitz, a financial planner at Evensky & Katz. "It's a great time to buy. When you buy at a point when everything looks ugly, that's good. You're buying low. It's forward thinking."

Rule No. 3: Don't let your home become a trap
Experts agree that tough economic times mean homeowners must figure out if they've got the best mortgage possible. Many people have adjustable-rate mortgages that are about to reset higher, causing their monthly payment to balloon.

It's imperative for these homeowners to refinance to a lower, fixed-rate mortgage that will give them more stability in their month-to-month finances.

Unfortunately, that's easier said than done right now.

The nation's credit crunch and subprime mortgage debacle mean access to loans is fast disappearing, or becoming prohibitively pricey, for borrowers with less-than-sterling credit.

"Interest rates are being more unevenly applied in the marketplace than they have been in recent years," says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage trends nationwide.

If you count yourself among those with good credit and have a FICO score of at least 680, don't squander current opportunities to save.

Recently, mortgage rates have moved up and down in yo-yo fashion. Try to take advantage of the best rate you can find.

It may be more prudent to spend a little extra on a fixed-rate loan and lock in a super deal rather than selecting an ARM that may cost far more when it resets, says Gumbinger.

Those with less-than-stellar credit have fewer options. That's especially true of borrowers who took out ARMs to pay for their homes.

"ARMs are strangling people. They are like a B-rated horror movie. If at all possible, get out of them," says Dee Lee, a Certified Financial Planner and author of "Let's Talk Money."

Consumer groups may help those whose credit is making it difficult to reset. The Homeownership Preservation Counsel, (888) 995-4673, has a 24/7 hot line where you can reach counselors. The Homeowner Crisis Resource Center, (866) 557-2227, also has professionals who can help individuals facing foreclosure.

Rule No. 4: Dust off your resume
When the threat of recession looms, it's smart to pay extra attention to your job.

"Corporations are in a wait-and-see mode when it comes to hiring," says John Challenger, CEO of Challenger, Gray & Christmas, the Chicago-based staffing firm. "Employers are getting more cautious about opening new offices, adding staff."

Working hard can help protect your job, but may not be enough. Instead, be strategic and figure out where you stand. Workers who cost employers money are most likely to be laid off. These include support staff in bureaucratic positions or workers in overstaffed departments.

By contrast, employees who add to a company's revenues are more likely to be viewed as valuable assets. So, try to take on work that no one else can do, or volunteer to head up long-range projects vital to your employer.

Also take note of your boss' performance. If your one ally looks like he or she may be at risk of getting bounced out, start forging additional alliances.

"Connect with higher ups so if your boss leaves, you aren't stuck," Challenger says.

Meanwhile, start networking now. It takes time to get a new job, especially if you're already several rungs up the career ladder. Entry-level employees in lower-paid positions need roughly two months to get re-employed. But higher-paid executives generally will spend five months on average to find another position.

"Keep your resume updated," urges Lee. "Keep a list of projects you've worked on as success stories."

Rule No. 5: Reduce your debt and boost savings
It's even more important to get rid of bills and amass extra cash now that the economy is on shaky ground. That's because various assets, such as homes and stocks, that helped bail out Americans out in the past few years have now plummeted in value.

For example, homeowners tapped $1.6 trillion in home equity from 2001 to 2006 to access extra cash, according to the watchdog group Demos. But that lifeline is already well-frayed.

"You need an emergency fund," Lee says. "Three months is realistic. No frills such as meals out or vacations -- just basics."

Unfortunately, "more low- and moderate-income households don't have adequate savings," says Stephen Brobeck, executive director of Consumer Federation of America.

So start saving.

"Most families can find $100 a month," Brobeck says.

This is also the time to eliminate plastic debt. Six out of 10 households don't pay off their entire credit bills from month to month, according to Demos.

Pay off your most expensive credit cards first. While credit card rates may fall, don't count on it, especially if you have a tarnished payment history. A shaky economy often gives banks a reason to increase rates.

"Banks are writing in terms that say 'We can change our rates for economic conditions or financial conditions,'" says Linda Sherry, director of national priorities at Consumer Action. "If they're not making profits in other areas, they have to make up that income."

Those who make late payments shoulder any increase in rates.

"At any given time, 5 percent of the population is delinquent," Robert Hammer, chief executive of R.K. Hammer, a bank card consulting firm. "You'll generally have to pay on time for at least a year before you can start renegotiating lower rates."

However, if a job loss pushed you to fall behind on payments and you have found new employment, don't wait the year.

"Call the company and ask for relief," Hammer says. "You may get it."

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