Financial Perspectives: Where are we now?


The markets over the last few weeks have awakened the anxiety that we experienced back in 2008. While there are many companies reporting strong earnings, the overall growth of the US economy has slowed.

Unemployment and housing continue to be two of the biggest obstacles to our recovery. Housing prices have continued to fall in many markets and unemployment was 9.1 percent at the end of July. Many academics and politicians are debating the probability that we are headed for another recession. There are a number of measures (some tracked by the Fed and others by private investment companies) that point to continued slowing of the economy.

Given all the volatility, what are we supposed to do? There a number of things that you can do to help your financial health.

First, review your portfolio (401k, 403b, IRA or investment accounts) to determine how your money is allocated. Most retirement plan providers offer tools on their websites to help you with this. Many even offer an asset allocation tool that you can use to determine how your money should be allocated.

Next, once you have determined this allocation, give some thought as to whether or not you can stomach the kind of volatility we have experienced over the last three weeks. If not, you may be over-allocated to stocks. This was probably the biggest mistake most investors made in 2008. They got too comfortable with the positive returns the stock market was delivering and did not give much thought to the potential for a market decline. In evaluating your portfolio holdings you need to keep a number of things in mind. All portfolios should have exposure to US and international stocks (I personally use mutual funds and exchange-traded funds (ETFs)) to accomplish this.

Next, as you look at your US stock allocation, you want to identify funds that hold stocks that pay dividends. Dividends can represent a significant portion of a stock’s overall return, and in this environment this is important.

The next area of concern is the mix between large, mid and small-cap stocks. There are different schools of thought around this topic. Some folks use a market-weighted approach, meaning they weight the portfolio based on the overall market – approximately 70 percent large-cap and 30 percent mid/small cap. Others may suggest you take an equal-weighted approach where all markets segments are weighted equally.

International exposure is very important given that there is more potential for growth outside the US. Most advisors will recommend significant exposure here as well – ranging from 20 percent ti 40 percent.

The fixed income portion of your portfolio should be diversified in a manner similar to the stock portion of your portfolio. Using bond funds instead of individual bonds is probably the best strategy for most investors. The funds that you choose should have exposure to corporate, treasury and mortgage-backed bonds.

In the current economic environment with the chance that we will experience inflation in the future, it is probably best to focus on bonds that have shorter maturities (one to three years on average). The reason you will want to do this is that bonds with longer maturities will drop in value more than bonds with short maturities when interest rates begin to rise. Another consideration is to include an inflation-protected securities type fund in your portfolio. Most companies offer these of funds, which usually invest in US Treasury inflation-protected bonds.

Hopefully this has given you some insights around how to look at your portfolio. We should also quickly touch on the need to control your spending during times of uncertainty. In a column a few weeks ago we reviewed steps to help control your credit card spending, so we will not repeat that again. Simply put, you need to be cognizant of your spending and the security of your job.

For example, think twice about buying that new car. You may be able to make do with repairs on your current car for the next couple of years. This can save you hundreds of dollars per month. Also consider adding to your emergency fund, especially if you do not have 3-6 months worth of expenses set aside.

This may also be a perfect time to invest in yourself. If you have been thinking about completing a course to help maintain or advance your career, think about doing it now. The job market is going to get more competitive. The best trained workers are going to be the most desirable, especially in a recession.

As always, if you are concerned about any of the things that were discussed, seek the assistance of a professional.

Good luck!

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.  Family Wealth Services, LLC and Cambridge are not affiliated.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security. These situations are hypothetical in nature and do not represent a specific client.

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