I was burned out from exhaustion, buried in the hail
Poisoned in the bushes and blown out on the trail
Hunted like a crocodile ravaged in the corn
"Come in" she said
"I'll l give you shelter from the storm."
-- Bob Dylan, "Shelter From the Storm"
Earthquakes, hurricanes, tornadoes, floods -- depending on where you live, you've probably made at least a few preparations against the chance that you'll face one or another of these natural disasters. But what about a financial disaster?
"Most people don't think about the uncertainty brewing around the world right now," says Alan Haft, a financial planner and money manager with Kelly-Haft Financial. But the questions in play are serious.
Among the major concerns: the world economy may be in a bubble; China may be slowing down and headed for a hard landing; and it's tough to gauge how stable the U.S. economic recovery is. Bad news on any of those fronts -- among others -- could quickly lead to another global economic crisis. In order to shelter yourself from a potential financial storm, Haft advises his clients to run through this checklist.
1. Should I Be in Stocks?
In addressing this, the most important factor is how much time you have until you need your money.
If your answer is something to the effect of "within a few years," then regardless of what's happening around the world now, the answer is "no, you shouldn't have as much exposure to stocks." You should have a high concentration in more defensive things, such as cash and/or short term bonds.
Haft recommends using the Rule of 100 as a guideline (or the Rule of 120, as we're living longer these days): Subtract your age from whichever number you please, and the answer is the ballpark percentage of your portfolio that should be invested in a diversified mix of stocks.
2. Quality Is King
You should also ask yourself about the kind of stocks in your portfolio.
If you're invested in Johnny's Lemonade Stand Co., launched by "Skinny Johnny" across the street last Friday, you have a far worse chance of weathering a storm than you do if you're invested in a blue chip that's been around for a hundred years, and has deep pockets to dig into in case of trouble.
If a Category 4 hurricane were heading your way, would you bolt the shutters with bobby pins or steel rivets? The answer is obvious and when it comes to stocks, your answer should be the same. In this day and age, quality reigns supreme.
3. Cash Rules
There is a famous saying in financial planning circles: Cash flow cures many ills.
Imagine this: Your stocks get pummeled by Hurricane Deficit, but while you're holding on waiting for prices to recover, they pay you cash along the way.
Sound good? It does to me. That's why I like high-quality stocks that send me dividends. This way, even during rough times, they can pay for a couple of lunches while I'm waiting for their values to come back.
4. National or Multinational?
Speaking of lunch: Would you like fries with that? McDonald's (MCD) makes around half its money overseas, so depending on the epicenter of the next financial disaster, it and similar multinational stocks might take an outsized beating.
Especially during uncertain times, knowing where your companies generate their revenue is essential. After all, however unlikely it is, should Europe's economy implode, you don't want to find out after the fact your favorite company makes most of its money selling to the French.
5. Embrace What Goes on Sale
Imagine this: Best Buy (BBY) is on the ropes, and the CEO blurts out, "Big screen TVs on sale for a hundred bucks!"
Would you head to the store? Of course you would. And that's why if all hell breaks loose, the markets just might be blurting out the same. Apple (AAPL) at $350? Bring it on.
At the moment, the market tide is high, lifting all boats. If that changes, you'll likely find some great bargains flopping around on the sand after the tide goes out.
6. Do Bonds Look Good?
Feeling good about those bonds you're in? Great. If the Iran vs. Israel conflict heats up, there's a decent chance they won't suffer as much damage as your stocks will. But be aware of how long your bonds are: It's more important than you might think.
Rule of thumb: The longer it is until a bond reaches maturity, the more likely it will lose value if interest rates spike. Conversely, the shorter the bond, the less you should suffer.
7. Credit Counts
Whether you're invested in individual bond or a bond fund, you need to know its credit quality.
%VIRTUAL-article-sponsoredlinks%Maybe you're holding a bond that's throwing off 8 percent. Fantastic. Good stuff. Well done. But why is it throwing off that much? Chances are the credit quality of that bond isn't all that great. Can anyone say "Johnny's Lemonade Stand?"
Remember Warren Buffet's famous line: "Only when the tide goes out do you discover who's been swimming naked."
8. Hedge It
Not sure which way the financial winds are blowing? Take heart: Few people are, and those who say they can tell you for sure typically don't know what they're talking about. That's why smart guys often hedge their bets with smaller stakes in such bad-weather friends as gold or inverse exchange-traded funds, and set up stop-loss orders to limit their damage when the bottom falls out.
Those might not be bad ideas for you too, so be sure to check them out. And that's what the next tip is all about ...
9. Educate Yourself
Even if you didn't like school all that much, you shouldn't invest without knowledge. Or as Buffett put it, "Never invest in a business you cannot understand."
10. Don't Panic
Finally, should markets fall, the U.S. economy tank, or Russia invade Central Europe, don't panic. Remember: The worst of times are often followed by the best.
If you educate yourself, hang tough and follow these other tips during unpredictable times, you just might find some shelter from whatever storms may come.
10 Steps to Protect Yourself From the Next Financial Disaster
Interest rates are low, but that's no excuse to accept 0.01 percent interest rates on your savings. Just a little shopping can find you many FDIC-insured savings accounts paying as much as 1 percent in interest, usually with no fees and easy availability to your money through electronic funds transfers. Compared to the near-zero rates that uninsured money-market mutual funds and other alternatives pay, high-interest savings accounts are a much safer way to save.
Banks still try to get customers to pay more for less, with one recent threat to charge fees for basic deposit accounts if the Federal Reserve cuts interest rates further. But many online banks not only offer fee-free options on their checking and savings accounts but also pay interest, and many have extensive fee-free ATM networks or reimbursement arrangements. If your bank follows through on threats to raise fees, taking your business elsewhere is your best move.
Bankrate reports that the average credit card charges around 16 percent in interest. That's a guaranteed money-maker for the banks that issue cards, but a big loser for those who carry balances on their cards. With many cards offering promotional interest rates as low as 0 percent, using them to get rid of high-interest cards is a no-brainer move and can help you pay your debt down faster.
Mistakes on your credit history can keep you from getting a loan that you want to buy your next home or car, but they can also have consequences you'd never imagine. Increasingly, insurance companies, apartment rental agents, and even prospective employers order copies of your credit report to see if you're financially responsible. Be sure to take advantage of your free credit check at the government's annualcreditreport.com website to make sure the three big credit-rating agencies have everything right before mistakes come back to bite you.
Payday loans have gotten more tightly regulated recently, but banks and other financial institutions still offer ways to let you get quicker access at your cash -- for a hefty fee. Resorting to short-term money fixes can land you in even more problematic situations down the road, because those solutions often create debt spirals from which it's hard to emerge unscathed. Set up an emergency fund instead and be prepared in advance for the money woes that life throws your way.
Interest rates have risen during the last half of 2013, with a typical 30-year mortgage carrying a 4.5 percent interest rate. But many homeowners still carry higher-interest mortgages from before the financial crisis. Now that home prices have risen, you might be able to refinance for the first time, and many homeowners have used lower rates to cut hundreds from their mortgage payment or shift to a shorter-term 15-year mortgage to pay off their debt faster.
Too many people never update their insurance coverage to deal with changes in their coverage needs, whether it comes from changes in family status for life insurance, health conditions for health-care or long-term care insurance, or even what types of property you own for homeowners' insurance. Don't wait for disaster to strike; check with your insurer or agent to see if your current coverage meets your needs.
In the past, investors had to pay hundreds or even thousands of dollars just to make a simple stock purchase. Now, though, the rise of discount brokers, low-fee index funds and exchange-traded funds, and freely available investment news and advice have made it silly to spend large amounts to get access to the financial markets. If you're still paying your broker too much to invest, look into alternatives that can help you avoid cutting serious money out of your retirement nest egg.
Everyone likes a tax break, and one of the best ones for you to use involves making contributions to a tax-favored retirement account. By putting money in an IRA or 401(k), you can reduce your current taxable income and save on your taxes while also preparing for the future. With 401(k)s, your employer might even chip in a bit on your behalf. Even when times are tough, finding even small amounts to save can put time on your side and make a big difference down the road.
Many investors found out the hard way this year that bonds aren't as safe as they thought, with some major bond funds posting double-digit percentage losses in 2013. Despite those losses, bonds still carry substantial risk in 2014, with many calling for imminent interest-rate hikes that would erode their value further. Even now, bond rates are so low that they don't compensate you much for their risk.
If you pay full price for just about anything these days, you're paying too much. The rise of deep-discount stores has led to falling prices at stores and shopping malls. Moreover, online tools like coupon sites, daily-deal offers, discounted gift cards, and cash-back credit-card deals can cut your costs as well. With all these tools, you won't find many situations in which you have no chance of getting a bargain on the items you want.
In the past, many young adults focused on getting into as strong a college as they could, figuring that their degree would pay them enough to make up for the costs they incurred. With college graduates facing a more challenging job environment than ever, smart students are thinking about college costs before they make a decision on a school. By maximizing financial aid and looking at lower-tuition schools with nearly as strong educational quality, you can avoid creating a big debt hole that you'll struggle with for years into the future.
If you don't have a will, a power of attorney for financial and health-care matters, and an advance directive to tell medical professionals whether you want certain life-preserving measures taken if something happens to you, then you're putting your family at risk. Many people don't have even these basic estate-planning documents, but getting them in place is easier and less expensive than most believe. Get your affairs taken care of in 2014 and save your loved ones some big future hassles.
Resolving to be more financially astute and to avoid common mistakes will help you get your finances in order more quickly. These tips should give you more money to help you meet all your financial goals.