ADDRESSING THE FINANCIAL CRISIS
Average Montanans have a lot at stake in how the widening financial crisis plays out. In times like these, I believe it is best to be cautiously optimistic.
People frequently ask me if they should be alarmed and whether the current financial crisis will lead to another Great Depression. The current financial problems facing the economy are part of capitalism. Accounts at banks are insured by the FDIC. Banks are solid and strong. Accounts at brokerage firms are insured by the SIPC. Except for the big shots on Wall Street who roll the dice every day, it should be business as usual for everyone else. The interventions so far by the Federal Reserve and the U.S. Treasury, the existence of federal deposit insurance, and the willingness of Congress to fight the downturn with fiscal policy are safety cushions that didn't exist 80 years ago.
Montana is one of the better places to be during troubled economic times. Montana is a state with an abundance of natural resources. We have gold, silver, coal, natural gas and other commodities that people around the country and the world want and need. The demand for these resources creates a steady flow of jobs and helps shore up our local economies during rough times.
The best advice I would offer Montanans during times like these is not to panic. A large number of Montana households have investments, many of which are in retirement accounts. When people get their monthly brokerage statements next week, many are likely to feel shell shocked at the recent drop in their account’s value. These folks need to keep their perspective. Investing, especially for retirement, is a long-haul affair. Even with the ups and downs, the stock market has historically returned about 7 percent a year, after adjusting for inflation. That means that $10,000 invested 30 years ago would be worth about $76,000 today -- but only if you left it in the market. Markets always recover and transferring significant invested assets as a reaction to the market is not good planning. If you have investments in your 401(k) plan, check to see if your plan offers financial advice from a professional. Many do. Take advantage of that and discuss your portfolio balance.
Whether the current financial crisis lasts just a few more months or continues for the next several quarters, I’d offer the following tips:
- Start saving. Individuals should have at least enough savings reserves to cover at least six months’ worth of expenses.
- Don’t panic and make rash decisions when there are changes in the market – invest for the long term.
- Shop at local businesses, when possible, as it will help keep our local economy strong.
- For individuals who have over $100,000 in any one bank, it is wise to spread it out over different accounts or banks, as the FDIC only insures up to $100,000 per account.
Here's another way to feel better during these tough economic times. Dig into your files at home and pull out a brokerage or 401(k) statement from a few years ago. If you've been a steady investor, you'll likely be surprised at how much smaller the balance was compared with what you have today -- even after the recent market decline.
- Finally, there's no law that says you have to look at your retirement account balance every week, so stop looking at it so often (maybe just every quarter or so) and have faith that the market will rebound.