Fagan Associates Archive for March, 2009

Somewhere in between the emotion of fear that investors felt just a couple of weeks ago when the Dow Jones Industrial Average hovered around 6,500 and the greed during the latter part of 2007 when the Dow peaked at over 14,100 there exists a time where investors can act in a rational manner, a place like now. At this time, it is critical to make an intelligent evaluation of your financial picture, unencumbered by emotion, to determine the right course of action. Some steps you might want to take, not in any particular order, include.

Redefine your financial objectives. This should be done before and after you take an evaluation of your current financial position. A look before may include “perhaps we will have to work until age sixty-five rather than age sixty-two” or “perhaps we will not be able to pay off our home in twelve years, but rather it may take fifteen.” Redefining or reevaluating your financial objectives prior to determining your current position allows one to weigh the merits of that redefinition. It also may help you to look at alternatives as your financial picture emerges. For example, your initial thought that you might need to work three more years may end up being modified to “perhaps we will need to work part-time from age sixty-two until sixty-five.” Regardless, if you redefine your financial goals up front it will help you to recognize the sacrifice necessary to accomplish those goals.

Calculate the value of all of your current assets. As one would do prior to making a journey, before you can determine the best route to take to reach your destination, you first have to determine your starting point. Many individuals can readily sum up their bank accounts, Certificates of Deposit, Individual Retirement Accounts, Brokerage Accounts, Stock Holdings, and Employer Sponsored Plans such as their 401(k), 403(b) or Deferred Compensation, but do not have a handle on their Defined Benefit Plan (monthly income that some employers provide to their retirees), a projection of Social Security Benefits, the cash value of life insurance policies or an approximation of the current value of their home, all of which can be sources of income.

Calculate your liabilities, including how much do you owe on revolving debt such as credit cards as well as non-revolving debt such as your mortgage or automobile loan. Furthermore, perhaps you are paying on a student loan from one of your children. Although theoretically this is not your debt, if you are paying it, it should be considered as yours for this purpose.

There it is, a simple balance sheet. Assets minus liabilities equals your net worth, your starting point. No, we are not considering the value of your car or household items as they will most likely depreciate down to little or no value. However, if you have accumulated any such items as investments with an intention of ultimately selling, then go ahead and estimate their value and add them to your personal balance sheet.

Determine your monthly living expenses. Be liberal and include vacations, entertainment, car repairs, home improvement and holiday gifts. Once having done so, establish a budget and then keep track of your expenses over the next three months to get a better handle on your actual expenses. Be sure to enter everything. If you’re like us, you are spending way too much on day-to-day expenses such as going out to eat rather than eating home. This begs the question, which is more important going out to dinner several times a week or reaching your goals. Quality of life versus achieving your financial objectives is a personal decision and one that you will most likely wrestle with constantly. We do.

Estimate the amount of money you will need to save on a monthly basic to achieve your goals assuming an annual return of no more than five percent. Don’t go out on a limb. Be conservative in your growth projections and most likely, from these levels in the stock market, you will be happily surprised rather than disappointed in the ultimate outcome. That said, we suggest using an inflation rate of three percent or so to help you take into consideration the negative impact of inflation. There are a number of websites that you can go to, put in the current value of your investments, enter an amount that you are saving monthly and a rate of return on that investment. The website will provide you with a balance at your prescribed time.

Finally, with all of this information at hand, take another look at your financial objectives. Perhaps they will need to be modified or perhaps you will need to modify some of the discretionary items you buy. That’s up to you, but at least you will now have your roadmap to get you where you want to go. The only question is how long it will take to get there. Either way, enjoy the ride! After all, we only go around once in life.

After listening to talking-head after talking-head tell us how this is the worst economy since the Great Depression, we took a brief look and compared then versus now. Unemployment during the Great Depression peaked at more than 25% versus today’s rate of 7.6%. Furthermore, the Gross Domestic Product of the United States shrunk by 50% during the Great Depression versus a total of 6% thus far during this “Great Recession.” Therefore, there is no comparison.

We then went on to take a look at a more recent period of time, the 1970’s, to determine what the economy was like then versus now and before we jump off the bridge over today’s economic worries, let us be reminded that the 1970’s were highlighted by double-digit Unemployment, double-digit inflation and mortgage rates above 15%, all numbers that make this recession look like a walk in the park.

What is it then that makes this recession that much more frightening? In addition to many other issues, we believe that there is a pervasive lack of confidence/faith/trust in our business leaders as well as political leaders. We also place some of the blame on the media, whom recognizing that some 70% of Americans are invested in the stock market, has stoked our fears and played us like a finely-tuned violin. In fact, a major business network, promoting one of its shows, starts ne with “with the economy in freefall; your investments on the brink…” We call this fear-mongering to say the least and sadly suggest that the race for ratings has outrun ethics.

Many business leaders have also let down the American public in their never-ending search for profits. Like some in the media, they have forsaken ethics, putting themselves before their shareholders and before their country. What a nice segway to how Congress and the Bush Administration, the bodies that should have been our watchdogs, turned a blind eye to the wrongdoing that was rampant over the past five years or so. Perhaps lobbyists got the best of these entities. Now, with the value of investor accounts cut in half, both the Republicans and Democrats squabble like young children in front of the cameras, once again placing their own interests above those of our country.

Finally, let’s look in the mirror. Is it our “right” to own a flat-screen television? Is it our right to travel to Florida every year when we all used to go camping when young? Is it our right to own a home? Why is it that we all have much larger homes, but smaller families? Have we, as individuals, lost our moral compass?

The bottom line is that most Americans bear some responsibility for this financial mess that we have gotten ourselves into and we’ll all have to pull together to get ourselves out. Hmm, sounds like we need to care more about each other and less about ourselves, more about our families and less about what toys we can acquire over time. It will take time, but we firmly believe that America will right itself and so will the stock market.