Hunkering Down Financially

It's time for us to hunker down. It doesn't appear the economy or stock market will recover for a while, perhaps not until 2009. When times appear tough financially, I like to do an inventory of our situation and make changes to protect ourselves. Here are the three areas on which I focus:

Investing: Cash Is King - As I have written before, I have a relatively conservative investment profile, with a relatively large percentage in cash and fixed income. I will continue to maintain this proportion for the total portfolio and have moved our short term expense needs into 100% cash and fixed income. Since we have retired, we have been working toward reallocating our equity portion from my company's stock to more diversified equity portfolio. We will continue to sell our company stock, but will wait until better market conditions to reinvest the proceeds.

We had begun to invest in CDs and bonds in mid 2006. In hindsight, we were lucky and locked in some good rates through 2012. Several CDs were callable due to having interest rates above 5%. Unfortunately, with the decline of interest rates, these CDs have been or will be called. For now, we will keep the funds from called CDs in cash.

Spending: Buy Only What We Need - To note, we are frugal spenders, which doesn't leave much room for cutting in this area. For example, we don't have cable, gym memberships or a cell phone for the adults in the family. (I still don't want a cell phone :-) Our daily expenses have been stable for the past two years. There are only a couple major expenses that we expect in the next couple years - a new roof and a new driveway. These will be big expenses, but we have been planning for them. Our cars should be good for at least another 3 to 5 years.

At this point, we do not plan to reduce spending. However, we do not plan to increase our spending either.

Risk: Be Prudent - The bursting of the tech stock, real estate, and securitized debt bubbles have made me more sensitized to issues of underestimating downside risk. In these three cases, many people thought the they wouldn't lose money because others were consistently making money.

To me, the issue isn't the level of risk, but the amount funds put at high risk. I like to keep the percent invested in high risk investments at less that 5%, preferably closer to 1-3%. For us, examples high risk would be buying foreclosed real estate, buying stock IPOs, or starting a new business. We would not avoid such investments, but we would want to limit the maximum loss to no more than 5% of our savings.

At this time, we only expect to make a few minor adjustments to protect our financial situation. While we are not nervous enough yet to make major changes, I expect there is a reasonable chance that we may need consider more extensive changes in the future, e.g. reversing retirement and going back to full time work. OK, hopefully not that extensive :-)

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This is not financial advice. Please consult a professional advisor.

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