In the wake of the Sept. 11 terrorist attacks on the United States, many of us wondered if our lives would ever be the same. What we witnessed is unprecedented in American history, leaving us with questions and concerns about our future. Because I’m in the financial sector, one question on the minds of many of my clients is, "What should I do about my investments?"
While I don’t have a crystal ball, I do have my optimism and faith that the economy, the stock market and, more importantly, America and Americans will pull through this incredibly difficult period of time. There’s no doubt our financial markets have reacted to these horrific events, but my advice is to take a deep breath and relax. Reacting out of emotion isn’t a well-thought-out financial strategy for you or your shop.
To get a glimpse of the future, let’s take a look at past events to see how they affected the market:
Pearl Harbor — Even before Dec. 7, 1941, the stock market, as measured by the Dow Jones Industrial Average, had already fallen 24 percent with the collapse of France in May 1940. The market fell another 17 percent by the time it hit bottom in 1942. By then, the economy was improving and a new bull market began to prevail. The market gained back its losses in six months time, and over the next five years, it had advanced by 83 percent.
The Gulf War — The market was cruising up until Saddam Hussein invaded Kuwait, causing it to pull back almost 20 percent as the price of oil spiked from $17 to $40 a barrel. The United States economy also fell into a recession during this time. But once we began the war against Iraq, the market almost immediately gained back the entire loss and began the greatest bull market our country had ever seen.
1993 World Trade Center Bombing — The explosion of car bombs in the parking garage of the World Trade Center on Feb. 26, 1993, was the first time the nation faced a terrorist act on our own soil. Despite the fact that Americans were facing a new type of vulnerability, the market was unaffected. The Dow Jones Industrial Average closed higher by 1 percent that day.
What About Today?
While we’ll always remember these current and past events in our history, does anyone remember where the Dow Jones Industrial Average stood at these periods in time? Anyone care to guess? At the time of Pearl Harbor, the Dow Jones stood just above 100. The Gulf War, 2,400. And the World Trade Center bombing, 3,370. Today, as I’m writing this article, the Dow Jones is above 9,000. You can see that in more than 60 years of American history, in good times and in some very bad times, the stock market has always recovered and gone on to new highs — continuing to create wealth for individuals. While I can’t make any guarantees, this time shouldn’t be any different.
Steps to Take Now
Let’s look at some steps you can take during this difficult period.
1. Review asset allocation. Did you put too much of your shop’s profits into technology stocks or mutual funds when that sector was on fire? Did you find out you aren’t as aggressive as you thought? Do you even know what asset allocation is? Asset allocation is simply how you divide your money between the asset classes of stocks, bonds and cash. Your allocation will depend on several factors that include your time horizon, age and risk tolerance.
Also, look at your diversification within each asset class. Diversification is how you further divide your money within each asset class. For example, your stock holdings should include large company stocks, small company stocks and international stocks that include both growth and value styles of investing. Diversification tends to smooth out the bumps in the market because different asset classes usually outperform at different times.
For instance, when large company growth stocks were shooting the lights out in 1998 and 1999, large company value stocks weren’t performing well at all. Just the opposite occurred in 2000 and, so far, in 2001. Don’t fall into the trap of investing in what’s hot today. When everyone is talking about how well a certain asset class has been performing, it’s usually at just the time it’s poised to pull back. Stay diversified!
2. Review your entire financial plan. Do you know what your shop is really worth? Consider having your shop appraised so you know the true value for your marketplace.
Do you have enough life insurance so your family will be taken care of if you pass away? Do you have a succession plan for your shop? Key man, buy/sell insurance? If you become disabled, would you still earn money? Insurance is a fundamental part of financial planning and should be seriously considered. It gives you the comfort of knowing that, if something were to unexpectedly happen to you, your family would be well taken care of.
But what if you live a long life? Don’t forget your retirement plan. Do you know how much money you’ll need to live comfortably in your retirement years? Do you have a plan that will keep your retirement income growing with the cost of living so you won’t run out of money?
And what about college funding for your kids or maybe your grandkids? Consider the best way to save money for your child’s education.
3. Review/create an estate plan. With recent changes in the estate tax laws, it’d be beneficial to review your estate plan. Do you have a will, or do you need to update your current will? Do you know who your beneficiaries are for your retirement accounts and life insurance? Do you need to create trusts to ensure a smooth transition of assets to your heirs?
4. Hire a financial planner. In a recent poll conducted by the Principal Financial Group, 85 percent of people said they’re "very concerned" about their financial future. Of course, I’m biased on this one since I’m a financial planner, but I believe that most people can benefit from working with a planner they know and trust. You may not know the answers to many of the questions I posed above, but a good financial planner will work with you to answer all of them and to develop a specific plan for you.
No one can predict with any certainty where the market will go in the next day, week or even months following the Sept. 11 attacks. But looking back at past events suggests that even significant national crises have had minimal long-term impact on our financial markets.
Best advice: Stand firm, be optimistic and have faith in the economy, the stock market and the United States of America.
Writer Thaddeus Toal is an independent financial planner based in Annapolis, Md., and can be reached at (410) 349-8030 or by e-mail at [email protected]