Jeanette A. Tucker | 10/11/2008 12:46:38 AM
As our country endures economic crisis, consumers are worried about the safety and security of their jobs, homes, retirement and financial futures. The current stock market plunge has triggered a dramatic chapter in Wall Street’s history.
As difficult as times are, and as challenging as they may yet become, there are lessons to be learned from history, according to LSU AgCenter family economist Dr. Jeanette Tucker.
“Although many American’s seem to be glued to the news and living day by day, it is important to remember that investments are supposed to be evaluated not day by day, but year by year and decade by decade,” Tucker said. Historical market data show that the stock market falls sharply after a national crises, yet rises to the pre-crisis level within one year.
Consider the long-term market reaction to the following events as outlined by nationally known financial adviser Ric Edelman:
– Despite a 684 point drop in the Dow Jones Industrial Average when the market reopened after the 9/11 attacks, the Dow returned to its pre-attack level within 60 days.
– One year after the Gulf War started, the stock market was up 32 percent.
– One year after the space shuttle Challenger exploded the market was up 31 percent.
– One year after President Richard Nixon resigned; the stock market was up 7 percent.
– One year after President John F. Kennedy was assassinated, the stock market was up 14 percent.
– One year after Pearl Harbor was attacked; the market was down less than 1 percent.
“Despite gloomy economic indicators there are still positives when today’s data are compared to earlier indicators,” Tucker said.
– Although 6.4 percent of homeowners with mortgages are behind on their payments and 2.7 percent are in foreclosure, these statistics pale in comparison to the Great Depression when 50 percent of all homes were in default. Most foreclosures occur among homeowners with subprime mortgages.
– According to the Mortgage Bankers Association, the total default rate this year is about the same as it was in 1985.
– The nation’s 6.1 percent unemployment rate is a far cry from the 25 percent in the 1930s.
– Although a dozen banks have failed in 2008, that’s nothing compared to the 832 that failed in the 1991-1992 recession, according to the Federal Deposit Insurance Corporation. Despite the failures, if your deposits are within the FDIC’s insurance limits, as is the case with most bank customers, those deposits are safe, regardless of the financial condition of your bank.
– The personal savings rate this year is better than it was in 1999, according to the Bureau of Economic Analysis.
– Six years ago, the Dow was 7700. Although the stock market has fallen dramatically, the Dow still is nearly 50 percent higher than it was six years ago.
– Although the financial stability of some well-known firms are making headlines, not every financial company faces dire straits. Many are quite safe and healthy.
Tucker cites Edelman’s action steps to help you work through periods of financial uncertainty and enjoy long-term prosperity:
– Be prepared for money emergencies. Be sure your cash is safe by keeping deposits within FDIC limits.
– Eliminate credit card debt and build substantial cash reserves to get you through unexpected job loss, health issues or other family concerns. A home equity line of credit is no substitute for cash reserves.
– Make sure you’ve provided for your family. This means owning the proper amount and type of insurance – life, health, long-term care, disability, auto, home and liability.
– Start or continue contributions to your retirement plan at work. Invest in a highly diversified manner, and avoid the stock of your employer – advice that employees of the failed financial firms now wish they had followed.
– When investing, assume the worst. Could you live with it? Don’t buy investments you don’t understand.
– Maintain diversification. Don’t buy individual securities; build a portfolio based on your situation.
– Don’t buy a house you can’t afford.
– Preserve your legacy. Update your estate planning, and make sure your will, trust and other legal documents are current and complete.
– Stay in touch. Get a good financial adviser and keep him or her informed about how you are doing, and check in whenever you face an unusual financial situation.
– Be skeptical about what you read, see or hear. The media aren’t smarter than you.
– Be realistic. Although we may have many good reasons to be highly optimistic, there’s no denying that our nation faces serious problems. Focused attention to these problems will lead to positive resolution.
“Still, the road may be slow and bumpy, with unexpected turns,” Tucker said. “Be realistic, patient and confident.”