NEW YORK -- With twin crises opening before them -- a fear of recession and war in the Middle East -- Americans are asking the most basic pocketbook questions: How bad will things get? What should I do with my money now?
The first question is unanswerable. And for that reason, the second question is the wrong one. No one ever knows exactly what will happen next to the economy or stocks, or how long any difficulties will last. You cannot get ahead -- as a jobholder, saver or investor -- by trying to adapt your money strategies to each new headline.
The right question is, "How should my savings be arranged so that I can weather every new crisis, no matter where it comes from?" Oil, remember, is only the latest addition on the difficult agenda of the 1990s. Already on the list was the ballooning budget deficit, high interest rates, the savings-and-loan disaster and a real-estate recession, to mention just a few.
The hedgehog response is to roll your money into a ball and not leave the bank until 2001. But that strategy carries its own risks. Inflation devours fixed-income investments. In real terms, you may never become a penny richer.
A smarter choice is to diversify your savings and investments and then pretty much leave them alone.
*For anyone who has the money, it's a fine time to buy a house. In many parts of the country, prices are 10 percent to 15 percent lower than they were last year. One-year adjustable-rate mortgages are at about 8.25 percent, reports Keith Gumbinger of HSH Associates in Butler, N.J., which tracks mortgage rates. That's just a whisker higher than the rate before the Iraqi invasion.
Average fixed-rate mortgages have risen more, to 10.29 percent. If thats rise makes it too hard for buyers to qualify for loans, builders of new houses probably will swing into "buy-down" programs, Gumbinger says. With a buy-down, the builder might arrange for your mortgage to cost 8.75 percent this year and 9.75 percent next year, then settle permanently at 10.75 percent.
*Just when you thought it was safe to buy a gas guzzler, along came Saddam Hussein to put sand in your tank. But despite all the protests over gouging at the pump, gasoline is cheap and would be a bargain even if the government raised the gasoline tax.
Should you fill your heating-oil tank now, before winter comes? Either way, you're speculating on the price. Oil might cost more in October, or it might cost less. Your call.
*As far as your savings are concerned, an all-weather plan asks first what your savings are for. The answer tells you what kinds of investments will serve you the best.
For example, any money that you absolutely must have within four years (such as freshman-year tuition or a wedding fund for your children) should be kept in a safe place. And I haven't picked four years whimsically. On average, that's how long it has taken for stocks that have dropped to make up all the ground they lost.
It is not safe to put this money into a mutual fund that buys long-term bonds. When interest rates rise, as they recently have, bond funds lose value. Safety-first money needs a guarantee. Buy a Treasury note or an insured certificate of deposit.
Retirement money is something else. You're talking 20 to 30 years and, on this road, Iraq is probably a pebble you can walk over barefoot. The bulk of your retirement fund (60 percent or more) belongs in well-diversified stocks, even if you're middle-aged. Stocks deliver the best long-term returns, and stock mutual funds catch almost any profits going. If you own a stock fund (including the one in your company's retirement plan), it probably has some energy stocks, so you made money on the rally in oil.
Should you quit the stock market entirely, given how truly awful it has been looking? I doubt it. Most investors buy and sell at just the wrong times. Essential money shouldn't be in stocks in the first place. Long-term money will probably do just as well if you leave it alone.