Michael on August 8th, 2008
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It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question.

With all that’s going on in the economy, I feel like I should be doing something differently.  Should I?

–Mike N., Tacoma, WA

You probably shouldn’t alter your investing strategy, but other financial changes could be appropriate.

More detailed explanation:

Investing During Uncertain Times

During periods of economic turbulence, much of the media’s attention is on the investment implications.  Not surprisingly, one of the most common and immediate reactions by most people is one of increased stress, since surely the “smarter” people have changed their investments in the new “climate.”

Relax. Deep breaths.

Provided you did your homework when you began to invest (specifically, that you chose an appropriate asset allocation) and that you periodically rebalance (review your investments annually to ensure that your original percentages still hold), there is no need to take immediate action simply because the word “recesssion,” the phrase “bear market,” or the oxymoron “repayments on sub-prime loans” are suddenly being uttered with greater frequency than a few months earlier.

Markets go up and markets go down.  If you began investing just a few years ago, it may have seemed that markets only went up.  But you knew (or at least certainly suspected) that they wouldn’t go up forever.  Still, a down market isn’t necessarily a bad thing for long-term investors, for it is during such periods that, by continuing to dollar cost average into your retirement plan, you purchase more shares at lower prices.   It is the shares purchased now, during down markets, that should have appreciated the most when you one day sell them during retirement.

Living During Uncertain Times

Although investing receives most of the media attention, other areas of personal finance are arguably more critical to re-evaluate given the changed economic environment. (Heck, that’s a key reason why investing is near the end of the process of learning how to live Beyond Paycheck to Paycheck.)

Here are some questions for you to consider in 2008:

  • Is your emergency fund big enough?

It makes sense to revisit this question now since the comfort level of keeping your job may have changed if, for example, you work in automotive or mortgage lending.  If you are let go, you won’t be too upset that you had recently increased your emergency fund.

  • Are you living within your means?

Of course this a question that’s good to ask at anytime, but especially today.  Getting your debt under control (and ideally eliminating the bad debt) is of immense importance if you were to suffer an economic hardship (such as loss of job, have a spouse who loses a job, have benefits reduced, suddenly receive less hours, etc.)  Note: these things don’t only happen to “someone else” in another field or with less education than you.

  • Are you negotiating?

Much has been made about how we’re in a buyer’s market for real estate.  It’s hard to argue that point, no matter where you live or the price of home you’re considering buying or selling.  But it’s a buyer’s market for most everything else as well – whether or not connected to a home purchase.  When the economy is down, less “stuff” is being sold.  But there’s still people who want and in many cases need to sell it.  Whether it’s a new car or servicing your old one, whether jewelry or furniture or just a plain old cell phone plan, don’t be afraid to haggle.  You could wind up saving big money.

Nervous? Don’t be. Unless you’re trying to get the McDonald’s french fries for less than is posted on the menu board, you won’t be the first person trying to get a discount or free add-on for the product or service in question.  Your worst case scenario (paying “sticker”) is no worse than what you’d owe if you didn’t even try in the first place.  Besides, do you really care about your reputation at the furniture store?

In a down economy, recession, uncertain time, or whatever you care to call 2008, it’s as important to stay the course when investing as it is to be opportunistic in the other areas of your financial life.

# # #

Financially speaking, what have you changed or specifically not changed recently?

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