Make your money work for you in times of financial turmoil
I’ve been hiding the bank statements from my husband. Watching the balance drop is stressful enough without getting into arguments over what we should be doing with the money that’s left. Should we keep investing steadily in mutual funds? Move our funds to our savings account? Or find some middle ground? We don’t have any easy answers right now. No one does.
Though the financial crisis unfolding right now in the United States might seem far away, the credit crunch has affected expats of all nationalities here in Beijing. Thanks to the recent troubles of the US banking system, your retirement accounts and college funds have probably taken a hit, and the money that you squirreled away for a rainy day has probably dwindled. By a lot.
Buy? Sell? It Depends On Your Timeline
Now is not the right time to move your money from stocks to cash, according to Wade Dawson, a partner at Beijing’s Austen Morris Associates.
“If you cash out now, you lock in your losses,” says Dawson. “We’re very close to the bottom, so unless you’re close to retirement age, continue investing your money.” Adds Erwin Verschueren, also a partner at the firm, “With the money you’re putting in now, you’re getting a historical buying opportunity. It’s kind of like going into a store and getting 40% off the merchandise – it’s a great deal.”
Canadian Fan Huang, a vice president at Deutsche Bank in Beijing, agrees that from a long-term perspective, global stock markets present good value. It might be a good time for bargain hunters to step in, according to Huang. But for short-term investments, he says, “Cash is king.”
“Many people’s attitudes about risk have changed given this massive drop in the stock market, and they are reassessing their own risk tolerance,” says Andrew Fisher, president of Maxim Global Wealth Advisors. Still, he agrees with Dawson that people should not even consider selling out at the bottom in an effort to preserve what’s left of their money – they’ll end up locking in their losses permanently.
Worried about investing during a crisis? Adopt the tactic of dollar-cost averaging, which means saving according to a set schedule regardless of market conditions – every week or every month, for example – instead of trying to predict market fluctuations.
Even in the midst of this crisis, the stock market has a place, albeit for money that you won’t need to touch for five or more years. Imagine that your investments are stashed in buckets and each bucket has a different time horizon. Your retirement money is in one bucket. “Most people retire at 65, so if you’re 40, you still have 25 years. That’s a long way off, and that money can take some risk,” says Fisher.
However, saving for your child’s education is a different goal, so that money needs to be in a separate bucket. “If your child is 13, you have a different time horizon – you need that money in five years. If he’s younger, you can take more risks with a goal of growing the money faster,” says Fisher. “This year taught us that you need to understand when you’ll be using those funds and take action to lower the risk of that specific bucket as you get closer to the time when you’ll need it.”
The Big Expense Around the Corner
If you’re saving for an impending birth or another overseas move, keep those funds in cash and government bonds, which are the safest investments, according to Huang.
In general, it’s important to distinguish between investment dollars and dollars that are a cash reserve or emergency fund. Most experts recommend keeping three to six months of living expenses in cash, to be drawn upon in emergencies. People with little job security might want to have a larger cushion.
If you have the luxury of long-term planning, keep an eye on the calendar so you can move funds out of higher risk equities well in advance.
Keep Saving for Toddlers
Parents with elementary-aged or younger kids should continue to open college accounts and take investment risks with a goal of long-term growth.
According to Huang, if you would like to be able to finance your child’s university education in five to ten years, you need to have aggressive investments such as stocks in your portfolio, because tuition and other costs of living are expected to increase at an annual rate that is much higher than the annual rate of return from your deposit in a bank. But make sure you can tolerate your risk level – you don’t want to lose sleep when the markets suffer temporary losses.
Shrinking College Funds
If your kids are heading off to university next year, now is no time to take on – or remain in – high-risk investments. In the ideal situation, parents of high school seniors would already have moved the college funds into low-risk investments or into cash funds. Either way, don’t move your money all at once, since the market will likely remain volatile for some time.
Financial advisors don’t all agree on the best strategy for this situation. Huang suggests waiting for market rallies and then using each opportunity to gradually reduce stock market holdings and increase cash reserves. If your college money is already in cash, keep it there.
Waiting Out the Storm
Experts have different predictions on when the markets might recover. “The market usually moves higher nine to 12 months before the end of a recession,” says Fisher. “So even though bad news continues to come out, the stock market tends to stabilize and move higher even while we’re still enduring a lot of economic pain. My personal feeling is we haven’t yet moved past the bottom. But those who think they should wait until it appears that the economy has recovered may wait too long and miss the biggest move up.”
“Right now, we’re closer to the bottom than to the top,” says Dawson. “The Dow can’t go down 40 percent every year.” He expects to see some stabilization over the next six months.
As for my husband and I? We have our savings in separate buckets, including one for emergency funds and several for our long-range goals. So all we can do is stay on track with our savings plan and hope a rebound occurs soon. And I suppose I should stop hiding those bank statements.
A Turbulent 12 Months for the S&P 500 (Nov 22, 2007-Nov 21, 2008)