Protect Your Money in a Slowing Economy
How can you protect yourself from the four big financial risks associated with the current economic slowdown?
In this article, I will take a look at a few tips that were offered by Money Magazine, and add my own recommendations for mutual funds that have worked very well for me.
1. Inflation erodes your investments and hurts your purchasing power. To protect your investments, allocate a percentage of your portfolio into a natural resources fund. “Fuels, minerals and agricultural goods have a certain amount of usefulness no matter what. You still need wheat to make bread, and your grocer will sell you a loaf if you slap down a gold coin.” We’ve been very happy with T. Rowe Price’s New Era PRNEX. Do keep in mind that the fund is not risk free, especially after gaining nearly 30% a year for five years.
2. Recession. A recession is loosely defined as six or more consecutive months of a shrinking economy. The biggest risk in a recession is not necessarily to your investment portfolio - your portfolio should bounce back nicely in the bull market that will follow a bear market. The biggest risk is earning less, losing customers, or being laid off. The best way to prepare is by having a well-funded emergency fund. Three months’ worth of living expenses is a minimum. A full year makes a lot of sense during a recession. Money should be completely liquid, so a money market account is a better choice than a CD. Another option is a high-interest savings account such as the ING Direct Orange Savings Account.
3. Dollar collapse. The best hedge: a foreign stock fund. We hold at least 20% of our portfolio in foreign stocks. We’ve been very happy with Dodge & Cox International Stock Fund (DODFX). Again, no guarantee as to future performance. We also have some exposure to China, Japan and Europe, in addition to holding Vanguard’s Emerging Markets Vipers (VWO).
4. Credit Crunch. It is getting more and more difficult to get a loan - mortgage, car, even a credit card. According to the article, if you are a homeowner and have enough equity in your home and a decent credit score, you can set up a HELOC (home-equity line of credit) now as a safety net for an uncertain future. Personally, I hope that a tightening credit situation will finally nudge Americans in the direction of borrowing and spending less, and saving more.
I am not a financial adviser. Prior to taking any action, please do your own research, or consult a financial planner regarding your specific situation.
Related reading:
Putting recession fears into perspective
Tightening the financial belt
When the market falls, don’t panic
Are people spending less because of a possible recession?
American investors should hold 30-50% in international stocks, not just 20%
Photo by marcelgermain
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Hunter Nuttall responds:
Posted: April 10th, 2008 at 7:48 am →
I like how you recommend foreign stocks to hedge against the dollar. When I hear people say you need to buy gold because the dollar is falling, I think “why not buy foreign stocks?” That way you’re out of the dollar, but also the stocks should appreciate. It seems to me that gold should only keep pace with inflation in the long run, while stocks generally go up.
Chris responds:
Posted: April 10th, 2008 at 8:28 am →
I’ve always wanted to buy stocks but never brave enough to pull the trigger. At what amount is a resonable start?
I agree with your last line that hopefully with everything that’s going on with the credit crunch people will finally stop spending more than what they make.
MomGrind responds:
Posted: April 10th, 2008 at 1:18 pm →
@ Hunter: I just read today on http://www.moolamoney.com that some experts recommend 30-50% in foreign stock. While I wouldn’t go as far as 50%, I am contemplating upping our foreign stock holdings to 25%.
@ Chris: I am not a financial adviser… but in your situation, you should probably start with a low-cost index fund such as Fidelity Spartan 500 Index Investor FSMKX. Check it out on the Fidelity website http://www.fidelity.com. Minimum is $10,000.
The Vanguard 500 Index VFINX is slightly more expensive but has a minimum investment of $3000. Check it out at https://personal.vanguard.com/.
Before investing, you should be aware of potential risks - and rewards. I highly recommend http://www.fool.com/ as a great source of investing info.
ironman responds:
Posted: April 10th, 2008 at 9:01 pm →
50% in international stock? isn’t that excessive?
MomGrind responds:
Posted: April 10th, 2008 at 9:18 pm →
@ironman: yes, I think it is. I may up ours to around 30%.
MilkYourMoney responds:
Posted: April 11th, 2008 at 7:03 am →
“Personally, I hope that a tightening credit situation will finally nudge Americans in the direction of borrowing and spending less, and saving more.”
I’m in total agreement with this comment. The solution for no money is not to borrow more, but to save. Home Equity loans can serve as a good option for some, but only under certain situations.
Until you are making interest and not paying it, are you saving.
MomGrind responds:
Posted: April 11th, 2008 at 7:17 am →
@ MilkYourMoney: savings rate in the US are so low, perhaps it can only get better from here. Or maybe it’s wishful thinking.
Investments on The Finance World For News and Information Around The World On Finance » Blog Archive » 4 Tips for Protecting Your Money in a Slowing Economy responds:
Posted: April 17th, 2008 at 11:56 pm →
[…] 4 Tips for Protecting Your Money in a Slowing Economy A full year makes a lot of sense during a recession. Money should be completely liquid, so a money market account is a better choice than a CD. Another option is a high-interest savings account such as the ING Direct Orange Savings … […]