With our nation at war and our economy struggling, consumers are unsure of how to navigate these tough times. Do you spend your money, get out of the market, or hang tough? SmartMoney magazine special correspondent, Vera Gibbons, offers some advice on “Today.” Read her tips below.
HOW DOES WAR GENERALLY AFFECT CONSUMERS? AND WHAT SHOULD PEOPLE DO? People tend to go into a holding pattern. They stop traveling. They stay at home and watch TV. They think twice about making those big purchases, and if this war drags on for months on end, we could go back into a recession.
In terms of what people should do: They should ride this out and not let their emotions get the best of them, or cloud their judgment. We have been through traumatic events before and this is yet another one.
TIPS ON HANDLING YOUR FINANCES DURING WAR: 1. Resist panic selling.
We don’t know how long this war will last, nor do we know what the outcome is going to be and this kind of uncertainty may cause people to panic and move their money to the sidelines. You don’t want to do this. Resist the urge to panic sell and stay the course. History shows that long-term investors are rewarded for being long-term investors.
2. Don’t make short-term bets.
In this environment, some people like to make short-term bets on sector funds like energy funds, gold funds, etc., but so many investors have gotten burned in the past from trying to catch quick upturns. And it’s just not the way to go. It’s never a good idea to try and time or chase the market because it’s usually a losing game.
3. Follow long-term goals.
There’s a lot going on out there, and we don’t know how the market is going to react from one day to the next. Much of what’s going on is headline-driven, but the bottom line is that you can’t let the anxiety and all the uncertainty get in the way of your working toward your long-term goals.
Historically, though, is there a pattern in terms of which sectors do the best after a crisis like war?
No, there’s really not. We went back and took a look at numerous crisis events, and there was no discernible pattern. After the 1991 Gulf War, the year’s top performers were biotechs, financials, and small cap growth stocks, but all were affected by economic factors that had nothing to do with the war. Financial stocks, for example, did well because of low interest rates. What’s interesting is that two groups that are usually seen as safe havens — energy and gold — fared the worst that year. And this supports the idea that long-term investing is what it’s all about.
4. Check your portfolio.
Now is a good a time as any to check that portfolio. Make sure you’re properly allocated, that you have a portfolio that’s both age and goal-appropriate, with a nice mix of stock, bonds and cash that you feel comfortable with, then stick with that.
5. Consider safe investments.
If, however, you have money in the market that you need over the next couple of years to buy a house or pay for your child’s college tuition, then take it out. That money doesn’t belong in the market anyway — particularly now because if this war drags on indefinitely, then we could go back into a recession. So, in cases like this, consider putting the money somewhere safe, like a short-term bond fund, money market account, or CD. You’re not going to make a killing here, under 2 percent, but you’ll sleep at night.
6. Continue saving for retirement.
Keep investing in your 401(k), even if you only invest up to the amount you get matching dollars. And keep putting money into your automatic investments as well.
7. Set up an emergency fund.
It’s always a good idea to have some extra cash on hand. Generally speaking, you should have anywhere from three to six months worth of living expenses in an emergency fund, but you should have this anyway — in good times and in bad times.
Vera Gibbons is a special correspondent for SmartMoney magazine.