The Best Offense is a Good Defense!
Tuesday, July 7, 2009 at 7:20PM 
When planning your financial future, it’s important to keep in mind an important fact…economic forecasters have a terrible track record of guessing what will happen next.
There are many lessons from the current economic crisis, but one lesson particularly relevant to this post is that the future is unknowable until it happens. Big brains and ready access to information doesn’t make anyone an economic clairvoyant, no matter how expensive and well tailored the suite.
So, when you hear the recession will end in the 4th quarter of 2009, don’t count on it. When you hear reports about the financial-sky falling, don’t count on that either. There are simply too many variables in the international markets for any individual or computer program to forecast reliably.
This is why I say the best offense is a good defense. Before I explain, lets dispel some common definitions of ‘financial defense’.
Abandoning your investment strategy and going to cash is not good defense. This is marketing timing! More often than not, market timing results in frustration, higher costs, and under performance. Don’t do it.
Also be aware, that many advisors and brokers disguise market timing. When they do, it’s called ‘tactical asset allocation.’ They tell you they can position your assets based on their forecasts about which markets are going to rally the strongest in the future. If you have to change your portfolio based on a prediction of the future, you’re market timing. Don’t do it, and don’t let your advisor do it either!
Important caveat, in order to stay the course, you must first be on a course worth staying. Please seek professional advice if you lack a strategy or are uncertain about what strategy your advisor has implemented for you.
Another popular sales pitch is to buy gold! Gold is a commodity and buying into commodities is pure speculation. Gold is often cited as a hedge against inflation, but in reality it’s hedging ability is in question. It hasn’t kept up with inflation in recent years and the standard deviation (volatility) is off the charts compared to inflation.
A move to gold is speculative and you’re market timing. Most often, investors will sell stock at the bottom and buy into gold after a sharp increase (selling low and buying high). Another troubling issue is how gold is sold. Listen to the fear mongering commercials along with the great promises of gold. If considering a gamble in gold, ask yourself, “if gold is such a great investment, why is the commission earned by the person selling you the gold worth more than the actual gold to the party selling it to you?”
So, that being said, how do you play defense?
First, increase your savings and build your emergency reserve. The stability of your employment should determine how much of a reserve to have in your savings account. For example, sales professionals should have a larger reserve than a government employee since the sales professional has a higher likelihood of experiencing a reduction of income in a recessed economy. With so much uncertainty in the economy, reserves should be greater than is typically recommended.
Secondly, after building your emergency reserve, eliminate credit card debt. If your employer has cut the 401(k) match, then you should suspend contributions and divert those dollars to pay down your credit card debt. Yes, this may be a low point in the market, but dealing with your near term risks are more important! The same is true with IRA contributions.
Once your emergency reserve is funded and credit card debt has been paid off, then resume contributions to your retirement accounts. Also, take a serious look at your retirement picture and understand how much you need to invest in order to achieve your desired standard of living. Too often people assume a few hundred dollars a month is sufficient. Don’t make financial assumptions! Know what you have to do so you can create an action plan to get you there.
In regards to retirement accounts. Make sure you are well diversified in US and foreign markets and that your allocation is rebalanced periodically. Also be sure your fees are minimized.
You should have an allocation to fixed income that is appropriate to your age and tolerance for risk. The financial industry does a clever job of siphoning cash from investor accounts in the form of fees (disclosed and buried). If you haven’t had your portfolio analyzed for allocation, risk, fees, and taxes, I would highly recommend it.
Last but not least, take full responsibility for your financial future and well being! Work hard, improve your skills and increase your education. Be sure to encourage those around you to do the same.
The financial state of our country requires a response similar to the response to the tragedy on September 11, 2001. We need to rally as a nation, support one another, work hard, and sacrifice immediate satisfaction for delayed gratification. After all, if we do all of these things and the recession does end quickly, then we’re still better off than if we don’t do these things. We win either way!
Economy, Investing, Jason Griffith, Saving in Economics, Leadership, Personal Finance 
