Never overlook the value of a good scare. Pondering the "worst-case scenario" provides food for thought.
While many experts believe that we'll escape with a relatively mild recession that ends by midyear, that declining interest rates will be helpful, and that there is hope for the stock market, one should consider the other side of the coin as well. A "safety-first" attitude, even if confined to a portion of your investment portfolio, is no joke during recession. Your personal confidence level, not the words of experts, should be the deciding factor.
"Face it, we're in a recession, and we've never gone into a recession with our institutions in weaker shape," said William Donoghue, publisher of the Holliston, Mass.-based Donoghue's Moneyletter.
He's convinced that the government has not been bailing out the savings and loan industry "in a timely fashion"; that the number of problem banks is likely much higher than publicly acknowledged; and that insolvent insurance companies could well be a nasty byproduct of recession.
"If the Saddam Hussein situation turns out really negative, or if the Federal Deposit Insurance Corp. has to nationalize two or three banks, the 1991 economy will be more difficult than now anticipated," warned Donoghue, the "guru" of money-market funds since the 1970s. "This is a time to build a portfolio that excludes credit risk, an extremely conservative portfolio."
There has already been a "flight to quality" in money market funds, with those investing primarily in U.S. Treasuries growing dramatically in assets.
For investors who seek good yield with no credit risk, Donoghue recommends Fidelity Spartan U.S. Treasury Money Market Fund or Dreyfus 100 Percent U.S. Treasury Money Market Fund. If you wish to expand your risk to include agencies backed by the full faith of the U.S. government, Donoghue likes Benham's Government Agency Fund. In addition, he favors the various Benham Target Maturities funds that invest in zero-coupon bonds.
Because he believes the U.S. dollar will continue to weaken, he recommends two no-load (no initial sales charge) currency-oriented funds, Scudder International Bond Fund and T. Rowe Price International Bond Fund. If you want certificates of deposit, he believes you should buy them from Merrill Lynch & Co. rather than your local bank, in order to get a better rate.
Also taking recession fears to heart is Jonathan Pond, author of the new book "Safe Money in Tough Times" (Dell, 1991). His highly personal recommendations to cut expenses during recession include:
* Quit playing the lottery. Lotteries are nothing more than a tax on the naive.
* Appeal your property tax assessment. Property values have dropped in many areas of the country and will drop in others as the recession continues.
* Raise the deductibles on car, homeowner and renter insurance policies, saving hundreds of dollars.
* Decide what you're buying before you go shopping, and resist impulse purchases. When you buy something just because it's on sale, you haven't saved money.
* Don't be taken in by promotions, such as for magazine subscriptions. If you want a clock radio, buy a clock radio, not a magazine.
* Finance car purchases over three years or less. If you have a longer-term car loan, you can't afford that car.