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Avoiding Financial Anxiety

October 2008

Picking Stocks

It’s easy to feel worried and anxious these days—alarming headlines about financial meltdown, talk of recession, housing woes, stock and bond markets in turmoil—all against the backdrop of a hotly contested presidential election. With all the crazy news and negative noise, it’s easy to feel that you have to do something, but when you are in the grip of strong emotions, what you do can be the wrong thing. Another trap that you can fall into in tough times is to get so depressed by the news that you don’t take action when you should. Here are seven tips to help you keep your head when everyone around you is losing theirs.

1. Check your cash cushion. Everyone should have a cash emergency fund that’s big enough to cover three to six months of ordinary expenditures. If your job outlook is uncertain, or if you’re in or starting retirement, a larger cash cushion can make sense. Conversely, if you have more than enough cash on hand, and you are in good financial shape for the long and short term, then the current financial crisis can bring real buying opportunities.

2. Check your budget. You can’t control markets, and even the pros can’t time them, but you can control your expenses. Take a good hard look at your spending habits—chances are you’ll find plenty of ways to save, big and little. Put the extra savings aside in your retirement account or use it to pad your cash cushion if it’s not quite plump enough.

3. Remember that feelings are not facts. Markets, economies, and your own financial situation are often painted too black or too rosy. While the current credit crunch is a serious problem, there are reasons for cautious optimism. One financial planner at Morningstar, Sue Stevens, calls the current mood “irrational depression,” the flip side of the 1990s mood that Fed Chairman Alan Greenspan once dubbed “irrational exuberance.”

4. Tune out. One of the best ways to regain your perspective is to tune out the noise: turn off the TV, switch to books on tape or music in the car, stop compulsively checking your portfolio. Don’t be like the rubbernecking drivers on the highway who are so busy looking at a smashed car that they wind up in a fender-bender of their own.

5. Take the long view. Last night I watched the first two episodes of the marvelous HBO miniseries John Adams, now out on DVD. The scenes of the smallpox epidemic in 1775 and the primitive efforts at inoculation were enough to get me counting the blessings of modern life.

6. Don’t try to go it alone. Aloneness is one of the greatest contributors to financial fear. In our culture, our personal financial situation has replaced sex as the great taboo topic. Many people feel lots of guilt, remorse and embarrassment about how they’ve handled their money and that can make it hard to get help and advice. Getting help with your money doesn’t have to be intimidating—a good advisor doesn’t mind if you show up with all your statements in shopping bags; she’ll just dive in and help you sort it out.

7. Get a plan. One of the best ways to avoid emotional investing is to develop a well-thought-out investment plan and stick to it (with regular updates as your situation changes). If you are an investor who has taken the time to work out a financial plan and learn about your finances, you know that even with the best of investment strategies the value of your holdings may sometimes go down. History suggests that your investments will fare best if you use asset allocation, diversification and periodic rebalancing to weather market downturns, rather than trying to time the market or hoping to “get lucky.” But if you don’t have an up-to-date plan and a clear sense of where you stand financially, there is no way to know if you should be raising cash in the current market, or taking advantage of buying opportunities, or simply hunkering down for the duration. Scheduling some time with your investment advisor to review your portfolio is a great way to make sure you are on the right course.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Past results are not indicative of future performance. Outside sources used in this article are believed but not guaranteed to be accurate. Examples provided are for illustrative purposes only and are not representative of intended results that a client should expect to achieve.