Fighting the financial fear factor
BY SUZE ORMAN Special To Florida Weekly
Declines of more than 10 percent in the major stock market indexes over the past few months, along with the growing expectation of a recession, have set off a massive investor call to action.
By action I mean the urge to flee stocks for the apparent safety of bonds or cash. For the vast majority of investors, that move can be a costly mistake.
There will be a test.
At the same time that many people are overreacting to the recent market volatility, they're underreacting to other facets of their financial lives. The same fear that causes someone to bail out of a stock fund when the markets slip causes them to not act when faced with bills they don't think they can pay.
Be it a credit card statement or an impending mortgage reset, the tendency is to do nothing, and that inaction ends up costing a ton in the long run. Knowing when to act and when not to act is one of the keys to financial security.
When to stay put
I'm concerned with the millions of Americans who invest for the long term via their 401(k) and IRAs, and are scared by the recent declines in their portfolios. For these long-term investors, the best advice is to do nothing. Yes, nothing. If you have a well-diversified portfolio that's focused on building value over the next few decades, it doesn't make sense to overreact to a few months of volatility and bail out on stocks.
You need to focus on a bigger problem: If you put all your money into super-lowrisk investments such as money markets or stable value funds, you increase the risk that your portfolio won't grow enough over time to build a hefty retirement account.
I know what you're thinking: When the market rebounds, I'll jump back in and ride the next bull run. The truth is that it's hard to be a consistently correct market timer. What tends to happen instead is that we react too late on both sides of the market by bailing out after our portfolios have already taken a sizable hit, then getting back in after we've seen the markets rebound. That's a losing strategy.
Fear and greed
If your investment time horizon is 10, 20 or 30 years, stay invested in your stock funds and exchange-traded funds. Over time (meaning decades, not weeks), stocks have consistently outperformed other types of investments. That includes periods when the stock markets fall. Doing nothing is going to net you better long-term results than doing something.
Right now, sticking with your automatic 401(k) investments is a great move. Because prices are lower, your money buys more shares. When the markets rebound, the more shares you have, the more money you make. Keep adding to your stock investments rather than bailing out, and you'll position yourself well for the next upturn.
When to get moving
As quick as people are to react when their investments start to slide, they do just the opposite when dealing with debt. When faced with bad news about debt, the typical reaction is to freeze and do nothing. I'm talking about ignoring your credit card bill because you can't afford to pay it off, or ignoring an interest rate jump on your card balance. Or when your mortgage rate is going to reset, and you don't get proactive before the lender starts breathing down your neck.
Inaction is inexcusable when dealing with cash flow issues. The longer you let the situation fester, the worse off your finances will be.
Now, not later
If your problem is credit card debt, the best first step is to pay the minimum amount due on time. By paying just the minimum, you'll keep the credit card company off your back and have a good chance of not hurting your credit score. That's important, because the next step is to see how you can reduce your credit card costs.
If you have a record of on-time payments and a FICO credit score of 700 or so, you've got a good shot at getting your interest rate reduced simply by calling up the card issuer and asking. If that doesn't work, your next step is to shop around for a balance transfer to a card that gives you a better rate deal. Just be sure you understand the transfer costs.
Those of you facing an unaffordable mortgage reset also need to take action. I'm not going to sugarcoat this -- the odds of your lender working out some sort of deal with you aren't great, but you need to be proactive. That means contacting the lender to talk about any restructuring options long before the reset hits. If you wait until the reset kicks in, and you fall behind on your payments, the lender has lost a whole lot of motivation to work with you.
- Suze Orman is a best-selling author and Emmy award-winning TV host whose new book, "Women and Money," was published in March 2007. For details, please visit www.suzeorman.com.
