BY CARLA FRIED, DAVID FUTRELLE, AMANDA GENGLER AND GEORGE MANNES, MONEY MAGAZINE — 05/08/0
Don’t let this recession keep you down. Grab the opportunity to build a stronger portfolio, cut the fat from your budget, and give yourself a head-to-toe fiscal makeover.
1. Get your portfolio off the couch …
…and bring balance to your stocks and bonds.
If you’re like most 401(k) investors, you didn’t touch your investments last year, in the darkest hours of the bear market. That was hardly a sign of buy-and-hold discipline. The majority of 401(k) participants haven’t done anything with their accounts in years.
Say you entered last year with a 60%-stock/40%-bond mix. If you didn’t rebalance, that’s now a fifty-fifty split. Since 1926, the annual return for a 60-40 mix has been 8.5%, vs. 8.1% for the even split. Over 10 years that can mean an extra $41,000 in a portfolio worth $500,000 today.
On the plus side, the bear market has already “rebalanced” the portfolios of those who took on too much risk. In 2007 a third of workers in their fifties – for whom a 60/40 portfolio is typically a sensible proposition – held more than 80% of their 401(k)s in stocks; that’s down now.
But rebalancing isn’t a one-time event. Check your portfolio at least once a year, and reset it to your long-term targets if your allocation shifts by more than five percentage points. Don’t have that kind of discipline? See if your 401(k) offers an auto-rebalancing option (half of large-company plans do). Unsure what the right mix is for you? Go to cnnmoney.com/allocator.
2. Go on a Treasury diet…
…and bulk up on other types of bonds.
As investors have been slowly shifting out of low-yielding Treasury bonds – the shelter of choice in last year’s market storm – into higher-returning assets, Treasury prices have fallen this year. The result: Long-term government bond mutual funds are down 12.6% on average*, making them one of the poorest- performing fund categories year to date.
Worse, losses could continue if there are signs of an economic recovery or inflation ahead. So rebalance your fixed-income portfolio by shifting some money out of debt issued by Uncle Sam and putting it into other bonds. Both high-grade corporate bonds and high-quality municipals are offering much higher yields than Treasuries (corporates are yielding around twice as much).
In this environment, “no more than 20% of your bond portfolio should be in Treasuries,” says New York financial planner Karen Altfest. An easy way to gain exposure to munis and corporate bonds is through a professionally managed fixed-income fund, such as those found in the Money 70, our recommended list of funds.
3. Accept the new norm…
…and set realistic investment goals.
You got used to double-digit returns when times were good, which makes the pain caused by what’s happening now feel downright excruciating. If you had simply set realistic expectations – no, it’s not normal for stocks to rise 20% in a year – you wouldn’t feel so bad.
But our brains don’t work that way. And prior to the downturn, our most recent experience was one of the most extraordinary eras in history, marked by quarter-century bull markets for stocks and bonds, and a huge run-up in home prices earlier this decade.
Now that you’re faced with a true financial crisis, you need a coping mechanism. Try this on for size: On a piece of paper write out a series of “what ifs.” What if your portfolio doesn’t recoup its losses for another seven years? What if it takes another decade before your home value recovers?
Then jot down ways you’d adjust to these possibilities. Perhaps you agree to postpone retirement by a few years. Maybe you stay in your home longer than you planned.
By documenting how you’ll react to these scenarios, you’re creating lower expectations. And that will leave you plenty of possibilities for happy surprises.
4. Lose rate by refinancing your mortgage
Rates on standard 30-year fixed loans are at or just below 5%, about the lowest they’ve been in decades. So if you’re paying more than 6% on your loan – or have an adjustable-rate mortgage – and plan to stay in your home for at least a few more years, look into refinancing.
There are restrictions. Your new loan can’t be greater than $417,000. In pricey markets like New York City, that figure goes up to $729,750. Rates on larger jumbo mortgages are a stiffer 6.4%.
Also, lenders are shifting back toward old standards. Your monthly mortgage, insurance, and taxes shouldn’t eat up more than 31% of your monthly income, nor should your total monthly debt payments exceed 43%.
Before you forge ahead, make sure refinancing is worth it. Use the refinance calculator to run through your figures.
5. Juice your credit score an extra 20 points
Now that lenders are demanding to see what shape your credit is really in, the standards for good scores have changed.
While a FICO of around 720 used to give you a shot at the lowest mortgage rates, today you’ll need a 740 or higher to qualify for the best terms.
How can you bridge the gap? First, make sure mistakes on your credit reports aren’t dragging you down. Go to annualcreditreport.com and get a free report from the major credit bureaus: Equifax (EFX), Experian, and TransUnion.
Next, goose your score by lowering your debt-to-credit ratio. If you owe $2,000 but can borrow as much as $15,000, your ratio would be about 13%. Pay off enough debt to “get your overall utilization down below 10%, and you will see your score improve,” says score expert Gerri Detweiler of Credit.com.
Another trick: Avoid using your cards in the month or so before applying for a loan. Even if you pay off your balances at the end of the month, there’s a chance a lender might “pull” your score the day before those payments are recorded, making it look as though you’re tapping your credit.
And ask issuers to raise the limits on your existing accounts. “For all the news that card issuers are cutting credit, they are also selectively offering more credit to their best clients,” says Craig Watts of FICO.
6. Go cold turkey on monthly services…
…or at least threaten to quit.
When families resolve to lower spending, their instinct is to cut back on day-to-day splurges, like lattes or lunches out. Not the greatest idea. You’re forced to make a conscious decision to save every day.
An easier way: Take a second look at all the recurring monthly charges that accrue automatically on your credit cards. Those movie channels that you never watch? Drop them. The overseas calling plan on your landline? A phone card is cheaper for those annual calls to Finland. Whatever the silent drain, put a stop to it.
Even if you’re eager to keep the service but just want a better price, call and threaten to quit. Telling your provider you want out might get you a price break. If the customer rep can’t help you, you may end up with a retention specialist, who can offer even better deals, says Lyn Kramer, managing director of Kramer & Associates, a call-center consulting firm. Remember, in a shrinking economy, businesses can ill afford to lose the paying customers that they already have.
7. Turn off the TV…
…if that’s too hard, stop watching Desperate Housewives.
Television viewership is up in this down economy, which isn’t all that surprising. TV is, after all, a cheap form of escapism. But before you tune in to tune out the realities of recession, remember that prime-time TV is full of pretty people and even prettier things. All this glamour affects how you think about your position in the world.
According to Boston College sociologist Juliet Schor, “Television viewing results in an upscaling of desire. And that in turn leads people to buy.” Her study found that every additional hour of TV viewing per week boosts spending by roughly $200 a year. So a handful of sitcoms and a reality series or two can cost you more than a grand a year. Forget keeping up with the Joneses; now people are struggling to keep up with the Kardashians.
If you can’t bring yourself to give up TV entirely, at least stop watching shows centered on the lifestyles of the fictionally rich. Try COPS or The NewsHour With Jim Lehrer. No one ever looked at the PBS anchor and said, “I’ve got to get a blazer like that!”
8. Reorganize your insurance drawer
The lousy stock market has pushed down insurance company investment profits. This explains why your auto coverage is expected to climb 4% this year and premiums on your homeowners policies are set to rise 3% – even though your house is probably worth less today than it was last year.
This is a good excuse to rebid those services. Shop around for your auto coverage first, and then see what it will cost you to add homeowners insurance as well. Most of the time, you’ll save money on a package deal.
As you shop for deals, get quotes on higher deductible options for auto and homeowners coverage, to see if you can lower your bill that way.
As for life insurance, Prudential (PRU), Banner (BANR), and ING (ING) are among carriers that are boosting rates, reversing a multi-year industry trend of falling prices. It’s still worth shopping around if your policy is at least five years old and your health hasn’t deteriorated.
Start your search online. But also consult with a broker – specifically, one who sells policies from multiple carriers. Brokers can help identify quirks in pricing, says Judith Maurer, CEO of Tampa-based Low Load Insurance Services.
9. De-stress with the help of a health-care coach
As the downsizing of corporate America continues, the workers who remain are being asked to do more with less – a lot less. And chances are, this added stress is taking a toll on your physical and mental health.
Ignoring the symptoms can be costly. Not only can stress make you less efficient and more mistake-prone on the job – which could lead to a pink slip in the short term – but it can also lead to long-term health problems that might jeopardize your most valuable asset: your physical ability to bring home a paycheck for years to come.
Time to call in the coach. Today 56% of large employers offer the services of so-called health-care coaches, on the theory that good health will lower medical costs and increase productivity. The coaches are typically nurses or other specialists who can help you manage chronic conditions, says Scott Keyes, a health-care consultant at Watson Wyatt. They can also help with workout regimens, meal plans, and remedies to alleviate anxiety. So ask HR or your insurer if you can get one-on-one attention.
10. Be part of society’s safety net
Even Adam Smith knew that taking an interest in the “fortunes of others,” as capitalism’s leading thinker put it, can bring you a glow you can’t get from merely accumulating your own fortune. Studies have shown Smith was right.
Volunteer work on behalf of those less well-off than you costs nothing, connects you with others, burnishes your résumé, and reminds you just how lucky you are to have whatever it is you have – even if it is worth 40% less than before the bear market. And, oh yeah, helping others is the right thing to do.
Before you choose a charity, think about your passions, where help is most needed in your community, and what type of work might polish your job-related skills. To find inspiration for charities that need you but also fit your needs, check out CharityNavigator.org.
That said, skip those big charity balls. It turns out that how happy you are with what you have depends a lot on just who you’re comparing yourself to. These sorts of invidious comparisons can cost you actual money without your even realizing it (see No. 7).
11. Start your own “working capital” fund
With unemployment on the verge of hitting double digits for the first time since the early 1980s, investing in yourself is really another form of an emergency fund. So start a capital fund for your career.
Put in enough money to cover travel and other job-hunting expenses for at least six months, the average length of unemployment for baby boomers who are currently out of work. And over time, use the fund to save money for career education and training – either to move up in your current field or to switch professions altogether.
“Pretend your career is a rental property,” says Wisconsin financial adviser Michael Haubrich. “If you don’t rehab it every so often, it goes down in value. And the rents you collect on it are going to go down too.”
Of course, the same is true for almost every other aspect of your financial life. What’s more, the investments you make now may pay off a lot sooner than you think.