The sobering '90s lived down to their image last year, as the decade opened with a tough year for many investors. The stock market, after surging to new highs and flirting with the 3,000 mark on the Dow, spent the latter part of the summer sputtering down nearly 20 percent and limped to the 1990 finish line at 2633.66.
It's hard to believe this represents a loss of only 4.3 percent from 1989's closing, or that if you include dividends and assumed they were reinvested in more stock, the year ended up with very little, if any, loss. But then, we spent so much of the year moaning about the market that it was necessary to believe we were dealing with mountains, not molehills.
There are real economic mountains out there, but they have more to do with a national recession and whether your job is at risk than with whether the market was up or down a few percentage points.
So, before getting into the stock market's outlook, I want to stress how important it is for you to take an accurate reading on your job prospects and on what you would do if you lost your job and the income that goes with it. This should be a family affair, so look at all the jobs on which your family's standard of living depends.
The sixth and last part of this series, dealing with financial planning, will include a work sheet and additional information on setting up a family budget. But there are still some issues you can consider now:
L * How many months of personal savings does your family have?
* What would happen to your health-insurance coverage if you lost your job?
* Do you have access to personal lines of credit through credit cards or a home equity loan? Are there ways to boost these limits so that you can get guaranteed access to cash should you need it? (Remember, once you're laid off, nobody's going to boost your credit limits).
* Are there ways for you to trim spending and get ready for possibly leaner times, building up a nest egg in the process?
* Might you face an early-retirement program? If so, how much money would you need to live on? And, what's the status of the various sources of your retirement income (Social Security, private pensions, individual retirement accounts, 401(k) salary-reduction retirement programs, earnings on your present investments plus any outside income)?
Of course, how seriously you address these questions depends on the odds you place on either losing a job or facing some other form of job-related cut in income.
This is most definitely NOT a time for everyone to adopt a defensive posture. Even during the depths of the 1981-82 recession, unemployment didn't get much above 10 percent. Only a few forecasters see our current problems as being in the same league as that deep downturn.
If you are confident that you will be among the 90 percent plus of people who continue to work throughout this recession, this could be a time for you to become more aggressive in your financial dealings.
That's because one simple reality has not changed down through the ages: One person's prosperity is often built on the crumbled foundation of another person's dreams. Great fortunes are being started or supplemented in many troubled areas of the economy today, including the stock market.
Despite the market's weak showing in 1990, I continue to find myself supporting investments in stocks for the longer haul. I do so with less ardor than last year. But if prospects for stocks don't appear great, they still seem better than those for yield-sensitive investments, real estate and other tangible holdings.
I say this with less than world-beating confidence for the simple reason that equities come out on top only in a low-inflation scenario. Rising interest rates and price levels would boost yields on bonds (that reduces prices for holders of bonds but increases interest rates for new buyers of bonds). It also would support the reflation of real estate values.
Currently, the Federal Reserve has adopted an easier-money policy to counter the economy's slide into an apparent recession. But I believe the Fed is sincere in continuing to support anti-inflation monetary policies over the long run.
Unfortunately, the nation faces an intractable debt problem, composed of a terrible federal budget deficit and a financial system seriously overburdened with debt.
The easiest way to get out of these binds is to reflate the economy and float our way out of debt, paying off both federal and private obligations with cheaper dollars. This could reflate troubled real estate markets as well and help get us off the savings-and-loan-bailout hook to boot.
If you lived through the inflation of the 1970s or, more to the point, knew someone who had to scrape by on a fixed income during that period, you'll understand why the return of high rates of inflation would be a disaster. So, although recession and possible deflation are today's concerns, reflation is my Public Enemy No. 1 for the 1990s.
Timing was my public enemy last year.