Riding out the economic storm
From the Public Employee Retirement System of Idaho
Just about everyone has the jitters these days because of the economy — a volatile stock market, a drop in the housing market and a rise in foreclosures, a jump in unemployment, and increased prices at the grocery store and at the pump. As bad as this sounds, many experts say we are not in a financial Armageddon. Most are advising people to sit tight, and ride out the storm.
For many investors, the first instinct might be to cut and run. The flight or fight response is a natural reaction when panic sets in. But selling low could mean taking a bigger loss than if you simply sit tight. Tracking returns over the short-term can be misleading, so before making any moves with your investments carefully evaluate your situation. Remember, in addition to any losses you might incur, you may be hit with transaction costs or capital gains tax...something often overlooked by investors.
Selling now could also put you out of the market when it rebounds, so you could miss out on future market growth.
Others might consider this a time to buy stocks while they are "on sale." While some investments seem cheaper, they may also be riskier. Experts are saying to exercise caution, and perhaps wait until the economy stabilizes a bit before jumping deeper into the market. The best bet is to look long-term; see what's going to happen in the next year, not the next few weeks or months.
In the meantime, there are several things you can do to tighten up your finances:
Watch your spending. Even if you think you're on top of your finances, you can still benefit from doing an analysis of your overall income and expenses. Tally your necessary expenses (housing, car, food, utilities, insurance, loans), identify your discretionary spending, and total your income. If you're feeling confident that you can continue your lifestyle, then perhaps you don't need to change a thing.
But if you're feeling the pinch, then look for ways to cut your spending. For some that might mean carpooling, for others it could mean cutting the number of times they eat out a month. If you're paying a housekeeper or lawn service, perhaps you can take over these jobs yourself to save money. Whatever it is, you won't know where to cut if you don't know where you're spending. The essence of budgeting is to save where you can so you can pay what you must.
Start eliminating high-interest credit card debt. Paying off credit card debt is always one of the smartest moves you can make regardless of the status of the economy. Contact your creditors to see if you can get lower interest rates to get immediate relief. And then cut up your credit cards. If you don't have them, you can't use them.
Continue with your savings — both for emergency purposes and for your retirement. If you don't have a "rainy day" fund, you might consider opening an equity line of credit with your bank for emergencies. This is a line of credit based on the equity in your home. If you should need to tap into it, it's less costly than using credit cards for an emergency.
If you're contributing to the Choice 401 (K) Plan, keep doing so. If you want to change your investment options, you might consider the Total Return Fund because it uses the same investment strategy as your Base Plan (pension). Let the group of investment managers overseen by PERSI's Chief Investment Officer Bob Maynard put their expertise to work for you. Overall, the Base Plan has fared pretty well even in these turbulent times.
As a PERSI member your Base Plan account is guaranteed... fund may experience gains and losses, your retirement benefits will always be there. Using a conservative approach to investing has served PERSI well over the years. In fact, it's only been seven years since profits were so high, members' received gain sharing. And only last fiscal year, returns were up nearly 20 percent.
Remember, the market historically goes up and down — we rejoice when it's up and get fearful when it's down; but both are part of the normal economic cycle. Just remember to check your own finances, make adjustments, and prepare to ride out the storm.