Reality check: Economies contract, there are just different ‘flavors’

Filed under: Banking & Finance |

Although consumer confidence declined throughout 2008 from a high of 117 during March to a low of 77 during November, it rebounded somewhat during December to 88 (perhaps consumers were merely happy for the holidays?).

During December, more consumers planned to improve their savings (17 percent vs. 12 percent during September) while simultaneously increasing the amount they pay on debt (19 percent vs. 14 percent).

Gordon Edgin, principal and financial adviser with First Command Financial Services, said that spending less and saving more is crucial for Americans, but he also encourages investors to shift their focus from short-term, quick fixes to long-term solutions.

Edgin, who retired from the Air Force during 1992 and has a juris doctorate, recommends that consumers and investors have a plan that includes much more than mere wealth accumulation.

“Risk management and insurance are critical as far as financial security,” he said.

And smart, long-term investing requires allocation between asset classes, including bonds, stocks, money-market funds, Treasury bills, certificates of deposit and others, and then “diversification within the asset classes.”

“Over the course of the past year, my clients have become very determined to accept responsibility for their own financial success — they’re resilient,” Edgin said. “They remember October 1987, for instance, and that market cycles are typically five to seven years. So we try to mitigate those ups and downs. While I don’t pretend to know what percentage of people are in a panic mode — it’s probably overstated by the media — people are becoming more savings-oriented, more ‘old-fashioned.’”

But the truth is that “part of all you make is yours to keep. Heretofore, our society had become conditioned to expect that money, a job, routine pay raises and home appreciation would always be there,” Edgin said.

Now that such things are no longer guaranteed, or are certainly on hold, he said, people are getting back to their roots — the way they were raised, to save — and deep down, inside, they realize they should’ve been saving all along.

“Americans have an inherent understanding of saving,” he said.

And, as numerous surveys show, people who have a financial plan are more confident about their retirement.

“Once people plot a trajectory for retirement and college for the kids, it gives them more confidence — they’re much better able to deal with the vicissitudes of the market,” Edgin said. “Good things come out of adversity — it makes you stronger. And behavioral changes made during adversity — rather than just a bump in the road — tend to have a longer-lasting effect.”

Traditionalists who grew up during the Great Depression are more savings-conscious.

“They’re willing to sacrifice potential for growth in the stock market for more security in bonds and cash instruments,” Edgin said. “They want less volatility and less rollercoaster.”

Before this current recession, baby boomers — whose parents grew up during the Depression — were more aggressive. Now, however, he said, they are starting “to see the virtues of their parents’ philosophy — they’re throttling back.” (Spoken like a true Air Force retiree.)

Younger consumers — such as Generations X and Y — who have not personally experienced such market swings, often have a desire for financial coaching, but feel it’s beyond their means — that only more affluent people can afford it, he said. “But it’s really within the means of most middle-class working Americans.”

The Dow Jones this, the Standard & Poors 500 that, has anyone heard anything else lately?

“Everybody talks about the stock market — but that’s just one aspect of a financial plan,” Edgin said. “What if there’s a disability or death in a family?”

Too many people think one-dimensionally, he said.

“Whether someone is a principal or a dual breadwinner, or a DINK (dual income, no kids) — it doesn’t matter. If the principal income is disrupted, it impacts their ability to pay the mortgage and sustain a household,” Edgin said “If you’re plan is based on the market going up, or doesn’t include the prospects of market downticks and even loss of income, then it’s not a comprehensive plan.”

But long-term care insurance is — “statistics show that one in two people will need long-term care in their lifetime,” he said. “We wouldn’t be caught without auto insurance, but odds are much higher that you’ll need long-term care.”

Here’s a sobering thought: Only 14 percent of Americans have long-term care insurance.

“Without it, you may unwittingly have to go on Medicaid — and you don’t want the government making that (long-term care) decision for you,” Edgin said.

And, insurance is worth looking into — even if you think you’re not eligible.

“Even some cancer survivors who may not be eligible for life insurance may still be eligible for long-term care insurance,” he said. “It’s about morbidity — not mortality.”

People who are single-minded and focus only on investments or the stock market will miss such important things, including short-term and long-term disability insurance. (Yet another thing Americans are woefully unprepared for.)

The United States has had 13 recessions since 1931 — it’s not “different” — it happens regularly, just with “a little different flavor.”

In other words, get used to it. Economies and markets are cyclical, and, well, hmm, we should have been saving and — gasp — living beneath our means.

Yes, Dad and Grandma were right, after all. But, whether Americans have learned any permanent lessons remains to be seen.

“There’s a direct correlation between the pain of this recession and how long people will save more money,” Edgin said. “The four most dangerous words in the English language, when it comes to finances: ‘It’s different this time.’”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.