Financial Planning with Instability
If you read our most recent Economic Observer you will find the following quote:
"Social instability is still brewing and will continue to increase as unemployment rates inch higher and people become more aware of (and disillusioned by) how ineffective government is at coming to their rescue. I fully expect to see far more visible social strife over the next 12-18 months."
In fact, you can go back more than a year's worth of Economic Observers and find this same social instability warning even though at that time we didn't have any direct evidence (anecdotal or otherwise).
Today we do.
The "Occupy Wall Street" movement has now even penetrated my sleepy little home town of San Luis Obispo. We didn't have bailouts here. We don't have big business TO bail out. But we do have a lot of people who can't find jobs and are increasingly frustrated by an economy that hasn't bounced back. They're upset and they have the time and energy to take to the streets.
Is this a good thing and what does this mean to your money? Let's get into it.
Economics Matters
What is going on in the world does have a direct impact on your local economy and eventually what is going on with your money so it is important to pay attention. This is what I mean when I say "economics matters." The riots in Egypt, Syria and Yemen last year were just the early stages of global social instability bubbling up. Eventually, they were going to find their way to America. They did so in the form of "Occupy (insert your city here)."
All the mistakes of the past several years (decades, really) - and I'm sure we could have a heated discussion about which of those choices was a mistake - has led us as a global society to this moment in time. It's not pretty.
And things are going to get worse (far worse) before they get better. There is no quick or painless fix.
Lost Decades Repeated
Think in terms of the 1970's or the 1930's - both truly lost decades. The economic imbalances between expenses and income or prices & value (which alone are two completely different concepts), teamed up with excessive leverage, unmanageable toxic deficits and political short-sighted thinking (it's all about getting re-elected) have put us in the same boat we were in 40 and 80 years ago.
We also are seeing the same kinds of social instability we saw then. That's because social instability is a common symptom (like a bad rash or vomitting or fever) of deeper (mostly) economic issues. Like a medical illness, you can treat the symptoms with topical solutions or drugs, but until you fix the underlying problem, the symptoms will keep coming back and usually they will continue to get worse.
Two Choices
On a personal level, at this point you can choose between one of two paths: (a) You can go along hoping that it all works out and that someone else will save you or (b) you can insulate yourself and your financial position as well as possible from the fall-out that is likley to come from the current economic implosion.
I have long said that "Hope is not a strategy!" At least for me (and most actively participating financial planning clients), Option A is not really an option. I've seen what happens when you let life hit you in the face and it's not pretty. Relying on someone else (like government) to save you has also always ended badly. History is riddled with casualties of mass proportions as the herd gets led over a cliff by someone who should have known better.
Your Strategy
So how can you protect yourself?
--- Operate your household responsibly - don't spend money you don't have. Save what you can.
--- Work to provide value to those around you. Help others as a way of helping yourself.
--- Be Independent (the opposite of dependent). Avoid blaming others for your problems. Create your own solutions. Start a garden. Grow your own food. Go solar and get off the grid.
--- Protect Yourself - be sure you have adequate insurance to cover catastrophic possibilities and cash reserves to pay for smaller issues that might (and in this environment, probably will) pop up.
--- Focus on YOUR Values - spend as much time and energy as possible on the things in life that are most important to you. You will enjoy your life more no matter what is going on around you.
Investments
--- Invest wisely. Grow what you already have. In last week's email I wrote ...
"Volatility and turbulence in the markets will [continue] ... since governments around the world are hell bent to prevent sharp drops that [are necessary to] clear the system. The Stock Market Roller Coaster is back in business and is going to be here for awhile."
Understand that we are in the beginning throws of a new recession in America. Equities historically lose 40% of their value in the first several months of a recession. That is a lot of potential downside. This is not a good time to be invested in risky assets.
According to HiddenLevers.com, a double dip recession will likely bring the S&P 500 back below $800. The Euro will drop another 19% and oil prices will really come down (below $40 a barrel). Even gold prices will suffer.
How will that affect your portfolio? This e-mail address is being protected from spambots. You need JavaScript enabled to view it for a free HiddenLevers analysis (for a limited time).
The Solution?
I've given you some ideas on how to address these issues at the personal level. What about on a grander scale? Is "Occupy Wall Street" the answer?
It is still too early to tell, but my guess is that it is not. The expression of frustration is reasonable, but I see way too much emphasis on having someone else (government and regulations) being the "solution" when they are actually the root of the problem.
If people really understood the basic principles of economics as well as those of personal finance (most understand neither), they would come to realize that all the "gifts" we keep asking for central governments to extend to us are an expensive exercise in futility and likely our own demise.
Summary
We are ending a 70-year exercise that could easily bankrupt us all - or it could work out OK.
Today's Social Instability is a reasonable reaction to significant underlying issues. Big corporations have been taking handouts from government (picked from the pockets of average citizens) for decades. People are frustrated by those companies and the pols who facilitated this charade.
Pandora's box is open. The question is, "How do you deal with it?" Follow the tips I've laid out above. Talk to a real financial planner about how they can help you. Be a part of that process and build your strategy.
In the end, you will be much better off. You'll be separate from the herd (so won't go over the cliff with them), you'll be in control and you'll be able to enjoy as rich and fulfilling a life as possible each and every day along the way.
John