Steps You Can Take. Looking at a year ago, who could have predicted the chaos which 2008 brought? I reviewed some of my older posts and as early as May of 2007, I wrote "Beware The Receding Tide." In that post, I warned that some of our previous investment success was more likely related to the strong markets than our ability to predict the future. While I am glad that I had some inkling as to the difficulties that we were likely to face, I have to admit that these difficulties were far in excess of anything I could have foreseen. I am now reminded of an old adage that I have tried to live by: "The ability to bounce back from unforeseen events is of much more value than trying to predict these events. So what steps should we take to protect and rebuild our wealth in the future?
1. Take Responsibility. A lot of people made mistakes that created the current chaos in the markets. Realize that much of the blame lies with those of us who insisted on buying more than we could afford, even if we had to borrow in excess to do it. Realize that you may be part of the problem and resolve to do something about it instead of waiting for others who "broke it" to get around to fixing it.
2, Look At Ways To Reduce Your Expenses. This is the safest way to build wealth. I have known several individuals who left the workforce way before their peers. Most of them will tell you that financial freedom is more about what you spend than what you earn. Cutting $300 a month from your living expenses is equivalent to having an additional $90,000 to invest at a safe rate of 4%.
3. Manage Your Debt. All debt adds risk to your life. Look at mortgage payments, car payments, credit cards, and consumer debt. A car loan at 6% seems to make sense but if you realize that you have to earn $840 before taxes to make a non-deductible $600 car payment, it makes less sense. Look at your mortgage loan. Now is probably the best time to convert adjustable loans to fixed rates. Regarding making extra payments on your mortgage loan, this is only a good strategy if you have no non-deductible debt.
4. Look at Every Investment Asset In Your Portfolio. What was your goal when you bought it? Has this goal changed? Is the investment still likely to help you accomplish that goal? If it has dropped in value, how likely is it to rebound in the future? Are you holding it just because selling it would be to admit that you were wrong when you bought it? Can you best recover your loss by selling it buying something else?
5. If You Are Retired Consider Part-Time or Temporary Work. A little extra earned income never hurt anyone. Our grandparents often retired because they were physically unable to work. Most of us are in much better health than our grandparents were at this age. We will certainly live longer than they did; therefore, we require more capital to fund our retirement than they did. Going back to work may sound like an extreme measure; however, these are difficult times and may require us to do some things that we haven't considered in the past.
5. Be Patient. Just as we didn't know how fast the value of some of our assets would drop, we don't know how fast they will recover. We are operating in an environment that we have not seen for decades and there is no sure-fire way to protect yourself.
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