There's a lesson learned in having lived through two world wars, several limited wars, a depression and too many recessions and economic downturns to remember. The lesson: don't panic. A recession is significant, but over a lifetime it's only a blip on a chart.
The economy is cyclical. It rises and falls. But, long-range, it continues to gain strength. Investments appreciate. The gross national product reaches new highs. People like you increase their assets. It will happen that way again.
If this recession follows the pattern of the past, the recovery could start as early as a few months from now, in spring, 1991. Yet this is far from certain. Prudence suggests that you plan on a recession longer and deeper than forecasters now are suggesting. There are signs it will be worldwide.
There's not much you can do about the economy. But there's plenty you can do about your own personal finances. It's late -- but not too late -- to get your affairs in order to withstand the buffeting you'll take in the new year.
INVESTING IN 1991
There is a feeling of uneasiness and foreboding spreading across the nation. It is an era of unprecedented change, and the uncertainties spawn bear markets. This much is certain: you should protect your assets by seeking safe harbors. Either move out of stocks or seek safety and growth over income.
"We're forecasting that the market lows will be seen in the first half of 1991 and that the subsequent rebound will lift the S&P 500 to slightly above its current level this time next year," says Arnold Kaufman, editor of S&P's investment outlook newsletter.
One of the more interesting forecasts comes from Yale Hirsch of Old Tappan, N.J., editor of the Stock Trader's Almanac. He believes stocks will rise sharply in 1991, after the Gulf crisis is settled. His reasoning: the latest fashion shows "hemlines about as high as they ever have been." Hemlines historically have shown a remarkable correlation to stock prices, he contends.
IF NOT STOCKS, THEN WHAT?
Investors have entrusted a trillion dollars of their assets to mutual funds, a 10-fold increase in a decade. A fact you may have overlooked is that only 25 percent of the funds are stock funds. The larger portion of mutual funds assets are investments with far less risk.
Continue to invest, but use great care in choosing a mutual fund, just as you would in choosing a stock for direct investment.
Receiving tax-free income may be the first consideration leading you to municipal bonds, but "there are other important benefits -- safety, diversity and marketability," says M. Kenneth Witover, senior vice president of Shearson Lehman.
"Municipal bonds," he points out, "are second only to direct obligations of the federal government for continuous payment and have a much lower incidence of default than corporate bonds. Over the years, municipal bonds have shown their ability to withstand difficult economic conditions."
Not all observers are that confident, expressing concern about the financial problems of a growing number of cities. You might want to protect yourself by buying only bonds rated triple-A and guaranteed by the U.S. Treasury. Or reduce your risk by investing in a professionally managed bond fund.
Mortgage loan delinquency rates rose sharply in the third quarter of 1990, the Mortgage Bankers Association announced in mid-December. Foreclosures rose slightly as well. These trends will accelerate.
The real estate market, the experts say, will take years to recover. No one knows just how many years. What should you do? Hang on. Make your mortgage payments. Wait for the recovery. Over time, owning your own home gives you larger investment gains than you possibly could make elsewhere.
If you're trying to sell a house, the market is not there. But the reverse of that coin is that this is a great time to buy.
"There never has been a better time to buy a home, and particularly one that is newly constructed," says Arthur Van Horn, a veteran broker with Houlihan/Lawrence, a real estate firm in Westchester County, New York. "Builders are overloaded. Prices have been lowered dramatically."
HOME EQUITY LOANS
Lenders will not like my telling you that home equity loans are obscene. Resist their siren call. As tax deductions on most types of consumer loans are phased out, lenders are urging you to discover this means of reducing your taxes and paying off your debts at the same time. When your regular income is in jeopardy, as it is in a recession, it's no time to remortgage your home. You need, rather, to be as liquid as possible, reducing your indebtedness rather than increasing it. Find another way to pay your installment debts. Save the equity in your home for real emergencies such as major medical expenses or retirement living.