At the risk of sounding alarmist, I must report that many Americans are suffering severe financial distress: record numbers of homes in foreclosure; personal and business bankruptcies on the rise; massive job terminations reported daily; corporate securities values plummeting. Unless you’re among those fortunate few untouched by current economic conditions, you should be taking action to protect your assets. Let me offer three suggestions to assist you.
1. Protect your home. Those of you with homes purchased between 2002 and 2006 are at greatest risk. Values began rising dramatically following the 9/11 terrorist attack, as a combination of low down payments and unrealistic loan standards induced many persons to lever their way into unaffordable homes. During this period sales prices increased dramatically, topping out in mid-2006. Thereafter values declined, wiping out equity as if it never existed—which, in fact, it never did. Today, many houses are worth far less than the mortgage loans encumbering them, referred to as upside down or under water. Added to the problem is an increase in mortgage loan payments resulting from scheduled rate adjustments provided in those mortgages.
If your home has negative equity or payments you cannot afford, you must take action. The first thing to do is approach your lender to request a loan modification so the terms are something you can live with. Responsible lenders will prefer to change the terms of a loan rather than commence foreclosure action that may result in acquiring an unwanted property. As for approach, contacting your lender personally will be far better than hiring one of these “loan modification specialistsapostrophe now coming out from under the rocks. In most cases these outfits merely take an up-front fee from you and do little or nothing to resolve your problems.
2. Protect your securities. It’s finally clear to the most naïve among us that holding a portfolio of stocks, bonds, or mutual funds is no guarantee of perpetual prosperity. Those of you who thought corporate securities only went up now better understand the terse reply of financier J. Pierpont Morgan responding to an inquiry as to what the market will do: “It will fluctuate!apostrophe This is why you must take charge; investment decisions cannot be left to your broker or your financial advisor.
Become familiar with the investment world. Subscribing to the Wall Street Journal and Barron’s Weekly is a good start. Participate in and conduct your own research in every decision involving your holdings. Never authorize a brokerage establishment or individual stockbroker to maintain a discretionary account. Avoid involvement with anyone soliciting your business through telephone or mail. Steer clear of the manipulated markets: annuities, foreign-currency trading, options, precious metals, penny stocks, and the like. Finally, consider doing your business with a discount brokerage such as Charles Schwab or Quick & Reilly, or over the Internet.
3. Protect your stash of cash. If you’re paying attention to our government’s leaders, it’s your duty to stimulate the economy. A tax credit equal to both the state and local sales taxes is available on new car purchases up to $49,500. To stimulate home sales, a credit up to $7,500 is offered to first-time purchasers. And as head cheerleader, President Obama exhorts us to get out there and spend . . . spend . . . spend. It’s funny, but I thought profligate spending got us into the mess to begin with.
I’ll offer a different message. Cut down on your spending and hang onto your cash. If it gets sticky, you’ll need the dough to see you through the tight spots. Never forget the universal rule: When the going gets tough, cash is king!
About the author:
Al Jacobs has been a professional investor for nearly four decades. He is a nationally syndicated columnist and appears regularly on ProducersWeb.com, DrLaura.com and SheKnows.com. He draws on his extensive expertise in real estate, mortgage, and securities investments to counsel millions on how to invest wisely and spend prudently. He is the author of Nobody’s Fool; A Skeptics Guide to Prosperity. Subscribe to his financial column, "On the Money Trail," at no cost or obligation, and sign up for his Life Stages Reports by visiting http://www.onthemoneytrail.com/.