Perhaps like many others, you have been glued to the headlines about the ongoing instability in our financial markets. Like you, I’ve been in contact with my personal financial advisor to see what she recommends—hoping that between the two of us, we have sufficient knowledge and foresight to minimize the losses. But, unlike the local fortune teller, neither of us reads “tea leaves” or can find magical answers in our crystal ball.
Few things are more unsettling than uncertainty about the future. If leading economic indicators consistently predict a recession, we can plan how to protect ourselves during the downturn. If the indicators consistently predict inflation, we can take the necessary steps to hedge against rising prices and eroding purchasing power.
Uncertain times like today, however, are more challenging because the current economic conditions are rather unprecedented. Continued uncertainty tends to breed fear, and continued fear tends to breed panic. Our economy is based solely on faith. When we have confidence in our system and confidence in our government, we react positively. We invest for the future, buy new homes and continue spending. Business grows and people prosper. When confidence lags, we tend to become much more protective of our financial resources, leading to reduced spending and more cautious investing.
Business declines and wealth decreases. The financial industry in the United States is very interconnected. What impacts the banking community has direct impact on the investment community, which impacts mortgage firms, insurance companies and other financial organizations. While the interdependence of our economy is one of its greatest strengths, it can also be one of the greatest challenges.
Talk of “bailing out Wall Street” sounds totally ominous to most families, especially when it comes with a price tag approaching a trillion dollars! Unfortunately, the problems faced in the stock market and other sectors of the financial industry impact small investors like you and me who hold stocks in our 401Ks or IRAs. It also impacts families and businesses here in Oklahoma by decreasing the funds available for loans or credit. Declining portfolios translate into declining wealth, which limits economic growth and prosperity for everyone.
Today’s losses are especially devastating for people in or near retirement, or for businesses with plans of expanding. Older investors may not have sufficient time to recover. As a result, they may need to stay working longer than expected or have reduced income in their golden years. Those of us with several more years to work can recoup much of the lost wealth because the market will eventually come back. When, however, is anyone’s guess.
Individuals and businesses that rely on the credit market to finance future expenses or expansion face higher interest rates and tougher requirements to get loans. Those two factors are especially difficult for small business owners to overcome.
So, what is a person to do?
- First and foremost, don’t panic. The U.S. economy historically has been amazingly resilient, through devastating hurricanes, bank closures, oil busts, depressions and recessions, periods of inflation and stagflation, Republican and Democratic administrations, and changes in Congressional leadership.
- Secondly, do take whatever steps are necessary to protect your financial resources. Talk to your financial advisor, keep up with the news and stay alert on what is happening. Be sure that you are comfortable with the information you receive from your advisor and follow your “gut” instinct. During uncertain economic times, sometimes “stay the course” is still the best advice—but only you can make that determination.
- Lastly, increase your savings and pay down your debt. That may mean a reduction in spending, but it will be your best defense against uncertain economic times. Interestingly, through all of the economic turmoil of the 20th Century, stocks maintain the best rate of return on your money. They are one of the few investments that have continually outperformed the average rate of inflation and increased people’s wealth. Investment is meant to be long-term and ride out whatever happens.
Today’s problems are symptoms of a larger, extremely complicated set of circumstances that cannot be resolved with one piece of legislation, a large amount of government infusion into the system or any other “simple” solution.
Hang on and fasten your seat belts. It may be a bumpy ride!
Sue Lynn Sasser, PhD, is an associate professor of economics at the University of Central Oklahoma.