The Minnesota Investor: Advice on navigating rough waters

  • Article by: ROSS LEVIN , Special to the Star Tribune
  • Updated: July 26, 2008 - 4:45 PM

Sometimes, when it feels as though you're drowning in an economy in turmoil and grasping for a nonexistent lifeline, consider standing up and walking to shore.

Several years ago, my wife and I found ourselves on the Brule River when I inadvertently steered our canoe into spider-filled tree limbs, showering hundreds of them down on us.

My wife fears arachnids the way politicians fear their pasts. She flipped the canoe and all of its contents and, in spite of being an excellent swimmer, found herself helplessly floundering in the water. As I went downriver to save our other stuff, I yelled, "Stand up!" She sheepishly popped up in the calf-deep water and walked to shore.

I am sure that many of you feel as though your portfolios have capsized, but don't realize how easy it may be to simply stand up. Given the upcoming election, let me blend the messages of our two main presidential candidates and offer you straight talk along with the audacity of hope.

Volatility is high. You can handle volatility. The stock market is bouncing all over the place. Bank stocks take off because Wells Fargo reports terrible earnings rather than horrible earnings. Volatility is the nature of investing. But as financial educator Ruth Hayden says, if you have ever been married or had kids, you can handle volatility. Life is not smooth. People don't always behave in ways that we expect them to, and stocks don't always do what we think they should. Eventually our kids grow up and we have fewer unpredictable moments; and in spite of the short-term, emotionally driven stock market swings, stocks eventually get priced correctly. Volatility in the markets gives us the chance to get higher returns over time.

Stocks are down, but you don't have to be. Our purpose for saving and investing is to eventually spend our money or give it away. If your mood is being dictated by how your portfolio is doing, then you need to do two things:

• Figure out if you are taking on more risk than reasonable.

• Get a grip.

You need to figure out if you are appropriately diversified. Base this on holdings, not on returns. For example, if you had an inordinate amount of energy in your portfolio over the past few years, your portfolio may have done well, but it may have had more risk than you realize.

In 2000, you were not diversified if you owned Microsoft, Intel and Cisco, because all of those stocks were in a class of assets that were being valued differently from other areas of the market. If you are doing way better than the market, it could mean that you are appropriately diversified, or it may mean that you are undiversified in a space that is doing better than other areas.

If you are diversified, then you will do fine when things come back; if you are not diversified, then you would need to sell before everyone else does in order to be fine.

As for getting a grip, think about it this way: When you are ready to spend your money, you will most likely spend around 5 percent of your portfolio a year. This means that, if your investments lost $100,000, you will sacrifice $5,000 annually of spending money. If you were planning on spending much more than 5 percent of your portfolio a year when you retire, regardless of how good or bad the markets are, you may want to reconsider retiring. The chances of outliving your assets increase substantially if your sustained spending rate goes beyond that level.

If you are still building your portfolio rather than spending it, then it really makes little sense to get uptight about what's happening. You get to keep buying cheap investments that, hopefully, will go up when you are ready to spend them.

Put projects, not life, on hold. If you are feeling lousy about the market, it is fine not to buy that new car or do the kitchen remodel this year. Those are one-time capital decisions that may make sense to defer.

On the other hand, if you are in a miserable job but have the opportunity to move to something more meaningful, even though it may involve a pay cut, you should consider it. If working in an environment that is healthy allows you to work a few more years, the salary hit that you would take is generally not that important.

Vacations are not projects. If you were going to take the family on a trip, don't wait for the market to recover to do so. This is the type of thing where you often only have one or two shots a year, so delays are effectively permanent.

There is no doubt that our current economic climate is difficult. But if you evaluate your portfolio honestly, adjust it accordingly and have the right attitude about it, not only can your boat cut through these difficult financial waters, but even if you do tip, you can always walk to shore.

Spend your life wisely.

Ross Levin is the founding principal of Accredited Investors Inc. in Edina. He is a certified financial planner and author of "The Wealth Management Index." His Gains & Losses column appears on the fourth Sunday of each month. His e-mail is ross@accredited.com.

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