A Secular Bear Market May Require Changing Strategy: Tips for Managing Finances During the Great Recession

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WATERBURY, Conn., April 22, 2009 — This isn’t the first time the country’s faced economic uncertainty, but this is a once-in-a-generation confluence of events that have led to a severe market downturn and a ferocious contraction of the global economy. An economic crisis of this magnitude occurring at a time when a record number of people are in or within arm’s reach of retirement is significant.

“This could be a secular bear market,” says Jim Coleman of Coleman Financial Advisory Group. Secular trends are major bull or bear trends that generally last for a decade or two. Cyclical trends are minor bull or bear trends within a secular trend. “With that as a possible time horizon, our planning lens must change to ensure we protect any existing wealth while taking advantage of the eventual bull rallies that periodically occur within the secular bear market. The combination of the severity of the market’s contraction and the possibility of an extended downturn means managing finances in a very different way,” says Coleman.

While there is no general prescription that will solve the woes of all investors, there are common factors to consider. Any tactical move should be a function of the safety of income stream, how much is already saved, and framed by life stage and goals.

• There’s no question that for those in the 20 to 30 year-old range, the down market is a buying opportunity. What’s more, plummeting home values coinciding with low interest rates have created an excellent opportunity for qualified first-time homebuyers.
• Investors in their 40s and early 50s need to buy selectively in the downturn – then sell selectively in the eventual upturn. For those who have not invested heavily in the market, it’s a good time to start participating. For anyone ready to commit to adding funds to the market, it may be wise to use the automatic contribution option, similar to a 401(k), with other investment accounts. However, if a significant nest egg is already in place, consider managing that more conservatively than the new dollars invested into the market. It’s equally necessary to manage any existing debt to avoid being overly leveraged in an environment where income taxes, property taxes, and the cost of living are likely to rise.
• Investors in the 50 to 60 year-old group have less time to recover from the recession’s blow. According to the Employee Benefit Research Institute 401(k) investors with more than $200,000 in account balances had an average loss of more than 25 percent from January 1, 2008 to January 20, 2009. For many, that may mean delaying retirement or taking a part-time job. For this age group, the recession combined with increasing longevity requires a shift in their focus from return on investment to reliability of income, known as the New ROI.
• Retired persons must keep an eagle eye on portfolio withdrawals. Although 4% a year has been the accepted standard safe withdrawal rate, it may be prudent to withdraw less in years of substantial market declines. Also, this year the Required Minimum Distributions (RMDs) from IRAs and employer-sponsored retirement plans, including qualified pension plans, qualified stock bonus plans, qualified profit-sharing plans, 401(k) plans, 457(b) plans, and 403(b) plans, have been suspended to alleviate the pain of making withdrawals from accounts that likely posted losses.

About Jim Coleman

Jim Coleman has been in the financial services industry for over 20 years. He founded Coleman Financial Advisory Group, voted “The Best Financial Advisor of Greater Waterbury for 2008.” Coleman specializes in providing comprehensive financial planning, asset management and estate planning services. He is a member of the Financial Planning Association and is the President of the Connecticut Chapter of the Society for Financial Awareness. Listeners in Connecticut rely on Coleman to deliver sound financial advice as host of All About Money, a radio talk program. He writes a financial planning column for a local newspaper, the Prospect Pages, and recently authored Educated Investing: Your Guide to Surviving and Thriving in the Fast-Paced Global Markets of the 21st Century. Visit http://www.ColemanAdvisoryGroup.com to learn more.