The crisis that almost collapsed the financial system, the markets and the economy was a once-in-a-lifetime event for most of us. The effect was not only monetary, but psychological. Shifts in attitudes about money, financial independence, retirement, leverage and consumption may leave their marks for years to come.
Many people have seen the values of their financial assets, including real estate, drop close to 18 percent; however, few have changed their approaches to investment management. Some affluent investors suffered losses of 40 percent to 50 percent – enough to shatter their faith.
January is Financial Wellness month, so let’s take a quick look back and then think about what’s to come and how to work toward restoring some semblance of stability.
There is a lot of evidence out there to support all the scary thoughts. The 100-year flood happens about every five to seven years. Markets are never average or normal and are usually above or below the bell curve. The tools available to make investment decisions are not forward-looking. They are always historical. Can you imagine using only the rear-view mirror?
Financial advisors need to help people rebuild plans that address new economic realities and long-term goals. With my long-time clients, I still check and double check to make sure I understand their thinking and feelings. In many cases, my clients’ families have become even more important, and we include them in meetings. Mindsets continue to shift, and approaches need adjustments. Simply keeping in touch is more critical than ever.
Many successful Americans come from average backgrounds and circumstances, and have worked hard to earn their success, wealth and comforts. Their financial position, investing and saving has been a source of pride. They felt they understood the rules of the game – the American dream. The sharp downturn in real estate values, falls of some of the leading financial institutions and job losses lead to weakened faith in the system.
Some have responded by shifting their behavior, reducing discretionary spending and looking for exceptional value. Psychologically, it feels wrong to be wasteful. Saving feels more moral and has increased significantly in recent months.
We’ve arrived at a time many are referring to as the new normal.
High unemployment and slow growth for the U.S. Gross Domestic Product of 1 percent to 2 percent have been forecast. This will be unacceptable to Americans, who will put pressure on politicians to encourage domestic growth. Americans are burdened with high debt and slow growth. Some are unhappy with government presence.
How do we turn the economy toward healthier growth and exports with a cheap dollar? These are questions that will continue to be explored into 2010. In the new normal, people will think and plan differently for the future.
There is a sense that the worst is over and a kind of pride in surviving the worst of times. There is a satisfaction that comes from emphasis on real needs, simple pleasures and a focus on managing what one can control. People are taking pride in their shopping skills. Shopping at thrift stores is no longer just fun and funky; it just makes more sense, in most cases, than buying new.
I’ve seen family ties that have been strengthened. In times of financial crisis, many families are forced to communicate. Even divorce rates are falling.
In the investment world, we’re focusing on quality and value, which is fundamental.
There is some evidence of renewed confidence. But investors remain cautious. Low-quality investments in the early stages of recovery may be attractive, but can be far too risky. It is important to measure the risk of investing against the risk of not investing. Staying in cash at no return won’t help in the long term.
Don’t sit and wait. Know what to fear and what may be advantageous. Embrace the new economic reality.
Judith A. McGee is the chairwoman and chief executive officer of McGee Financial Strategies Inc., an independent registered investment advisor. She is a branch manager of, and offers securities through, Raymond James Financial Services