Making the Best of a Bad Situation

Congress voted down the Troubled Assets Relief Program (“TARP”) legislation, much to the chagrin of the financial markets. At the moment, the markets continue to be in distress, despite a “dead cat bounce” in stocks today. What should you be doing in terms of your household finances?

If you’ve already established a diversified investment portfolio that fits your goals, your situation, and your tolerance for risk, sit tight.  This is not the time for making big moves into or out of your investments.  The stock market is likely to swing wildly for a while until there is confidence that the credit crisis is being addressed.  Even after that’s settled, we’re probably still in for a recession.

Review the stability of your financial situation
How secure is your employer’s business?  Have you prepared adequately for unforeseen emergency expenses?  If, like many Americans, you’re living paycheck-to-paycheck, now is the time to find ways to reduce your spending enough to allow you to start saving.

In the near-term, there are no promises that things won’t get uglier.  Wall St. Journal writer Dennis K. Berman argues that layoffs probably loom in a number of industries because corporate borrowing costs have skyrocketed.  Cost-cutting usually turns into “rightsizing” in these situations.

Princeton economist Alan B. Krueger, writing at the NY Times Economix blog, argues that capital-intensive businesses are likely to cut back on high-skill jobs in response to the present economic situation.  This runs counter to the trends in prior economic downturns, but Krueger shows 2008 data from the Bureau of Labor Statistics that are consistent with a trend towards greater employment reductions among more highly-educated workers.

Consider refinancing your mortgage
Yes, credit is tight, and this idea won’t be an option for many people, especially if you don’t have much equity.  But if you have a variable-rate mortgage, or you still have a fairly high fixed- rate mortgage, you should consider refinancing now; the attached link is to a refinancing calculator.  Once the government finishes spending hundreds of billions of dollars to stabilize the economy, interest rates will likely trend upward over the next few years.

Review and diversify your cash savings
Make sure your insured bank investments are within FDIC limits.

There appears to be an opportunity to increase cash yields significantly: Investors are fleeing for the safety of Treasury bills, driving municipal bond mutual fund yields to ridiculous levels.

Some municipal money market funds are yielding in excess of 5% right now; investing in one of the larger fund families’ offerings should be safe and you don’t even need to be in a high tax bracket to benefit from these yields.  Obviously I can’t guarantee the safety of any specific fund, but it seems to me that the level of fear reflected by these rates is irrational.

Don’t put huge amounts cash into one fund, of course. Still, having a chunk of money in one of these funds is a simple way to reap an unheard-of yield.  Althought I can’t believe I’m saying this, right now you could even justify putting the cash portion of a tax-deferred account into one of these funds.  This can’t last indefinitely.

Here’s another paradox: although Treasuries are a safe haven in terms of default risk, the risk of interest-rate increases seems enormous.  Treasury yields are lousy right now.  If rates go up, the value of the bonds will decline.

About the author

Thomas Fisher, CFP®

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