ADAM J. FINCH, CFP® & MICHAEL D. RAUTIOLA, CFP® CERTIFIED FINANCIAL PLANNER™ Professionals
The Revised Rescue Plan has passed the Senate and House of Representatives. Now what? According to a recent quote from Warren Buffet, “The plan is not perfect, but it is a crucial step in the right direction” (Isidore). Much of the continued market downturn after the plan’s passing is coming from a lack of confidence in the economy and the financial system, but that confidence will come back in time. And while a magic wand doesn’t exist in Congress and there is probably going to be some more bad news, ultimately, by adopting this plan, we’re doing the right thing and the economy and financial system will continue to work over time. We will get through this.
This plan is not going to rescue Americans from their individual debt problems and will not instantly get our economy thriving again, but let’s highlight some positives:
- First, the plan raises the limit on FDIC deposit insurance, from $100,000 to $250,000 (IRA’s remain at $250,000), and enlarges the FDIC’s borrowing authority accordingly.
- Second, it places restrictions on executive salaries and especially benefits to departing executives.
- Third, and perhaps most importantly, the plan allows the US Treasury to buy the troubled mortgage assets (at the heart of this matter) from financial firms. This effort hopes to ease a deepening credit crisis that is choking off business and consumer loans which are the lifeblood of the economy and the contributors to a string of recent bank failures. With this action, the Treasury will be setting a price on these loans and securities and establishing a floor that will allow other investors to enter the market. Credit needs to get flowing again and this is a step in that direction.
- Fourth, if Warren Buffet is right, there is a strong chance that the plan will not only recoup its costs, but turn a profit, thus recapturing taxpayer dollars.
A lot of folks are not spending money right now. Either they don’t have it or if they do have it, they are afraid to spend it. People are fearful economically and they are not wrong to be worried. However, a healthy economy with a growing Gross Domestic Product (GDP) depends on Americans spending money. Personal consumption accounts for nearly two-thirds of GDP (Skipper).
We think now is a good time to review the basics of your financial plan. A good financial plan is essential for everyone. Whether you are starting your career or in retirement, realization of your life goals, along with a plan to achieve them, is important. Understandably, the ability to remove emotions and stick to a strategy can be difficult. A big value we can offer is to help you take that emotion out of the financial planning and investment process and adhere to a strategy.
Since financial planning is only a means to an end, we may need to talk about solutions. As we grow older and depend more on savings, our risk tolerance usually becomes less. The biggest fear for many seniors is running out of money before they die.
To help alleviate this potential problem it is important to examine your spending habits and live within your financial means. Having a budget is part of a good financial plan.
A question that often comes up involves the investment strategy of ‘staying the course’ and we believe that it can be okay to change your course and strategy. Financial planning is not a one time event, but is and should be, evolving with your needs. Those needs can include your attitude and emotions regarding the investment markets. Remember the saying “If you can’t stand the heat get out of the kitchen?” If the volatility and risk of the investment markets are too much for you it is okay to move your money to safer investments because you can always get back into the markets when your comfort level returns. Just keep in mind that a major downside is if you stay in lower return investments like certificates of deposit or money market accounts, you may need to save more or make other adjustments to reach your long-term goals.
Another thing to consider about staying invested, “In 2004, SEI Investments studied 14 bear markets since World War II. Investors who either stayed in the market through its bottom, or were fortunate to enter at the bottom, saw the S&P 500 gain an average of 32.5 percent (not counting dividends) during the first year of recovery. Investors who missed even just the first week of recovery saw their gains that first year slide to 24.3 percent. Those who waited three months before getting back in gained only 14.8 percent” (Barkate).
In riding out market down-turns like this, a longer-term horizon is needed to allow for recoveries to materialize. Additionally, it requires patience to weather the up and down volatility and although we do not recommend ignoring your account, we also do not recommend that you look at and review it every day. However, if you decide to get out of the investment markets, timing for re-entering can be very difficult because no one can predict the bottom until after it is long gone.
Bottom-line, market fears may offer some buying opportunities for longer-term investors, but the horizon still holds a lot of legitimate bad news, enough to assure a rough ride for a while yet.
Barkate, Anthony. “Market Volatility-How You React Matters.” The Northwest Voice. 12 Sept. 2008. 07 Oct. 2008 http://www.northwestvoice.com/home/viewpost/76362.
Isidore, Chris. “Buffett: My Fix for the Economy.” CNN Money.com. Par. 1. 2 Oct. 2008. 7 Oct. 2008 http://money.ccn.com/2008/10/02/news/newsmakers/buffet.fortune/.
Skipper, Joe. “U.S. 2nd Quarter GDP Revised Sharply Higher.” International Herald Tribune. Business with Reuters. Par. 1. 28 Aug. 2008. 2 Oct. 2008 http://www.iht.com/articles/2008/08/28/business/28usecon.php.
We will be hosting our second client education event of the year on November 12th from 6:15-8:30pm at Sigma Financial Corporation in Ann Arbor. Like earlier in the year, we will focus on the investment markets and real estate markets of the past, present, and future, but will also heavily discuss the current economic/market news and environment. RSVP’s are required. Please let Laura know if you are interested in attending.
Also, on December 5th from 4:00-7:30pm we will be hosting an open house at our new office at 529 S. Ashley St. in downtown Ann Arbor. Everyone is welcome and we hope to see you then.
Our business continues to be successful because of great clients like you. If you know anyone else who is looking to simplify and organize their financial lives, please let us know. With their permission, we would be happy to contact them and introduce ourselves.
RFC Financial Planners
Toll Free: 800.203.9117
529 S. Ashley St.
Ann Arbor, MI 48103
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