This is the title of a movie I watched almost two years ago, but depicts what obtains presently in the economy. The plot of the story surrounded the sequence of events occurring in the lives of a middle class couple, as they adjust to life after being forced into unemployment. With their family savings and pension fund tied up in the husband’s failed former company, the economy in recession, their options at financial viability became a daily (almost hourly) challenge.

The movie does have some pointed lessons to be learned about care of investing. Prior Proper Planning Prevents Poor Performance. This phrase rings true if the economy is booming, but is doubly poignant if the economy is heading into recession.

An economic slowdown or even a full-blown recession does not necessarily mean it’s time to cash in your remaining stocks and hide your money under the mattress. Instead, this should be a time to review the lessons learned from last year’s market misery and make the necessary adjustments to your long-term investment strategy.

The first, and possibly most important, step you should take when investing during a recession is to immediately (if this wasn’t being done) start putting cash aside into a reserve fund, especially if you work for someone else. Because as the risk of layoffs drastically increases, the most important thing you can do is keep a roof over your family’s head.  An emergency fund should be equal to at least six-months worth of living expenses. This should be kept in a High yielding secure account.

Most investors feel that the economy will be better in the long run, and that the huge declines in bond (or stock) prices are only temporary, yet they are too paralyzed by fear to do anything about it! The irony in all of this is that this is precisely the time when it is wisest and most beneficial to invest. People are unable or unwilling to, because of this fear of apparent erosion of capital.

Recessions may very well present the greatest investment opportunities of a person’s lifetime. If you were given $10,000 to invest in a triple A rated bond, when would you want purchase this instrument? When the price is above par 103 or at a discount at 96? The wise investor will obviously choose to invest when the asset is at a discount.

If you are smart enough to take advantage of the situation, you will emerge much better after the market rebounds, especially when you realize all of the other investors didn’t buy the merchandise because they thought something must be “wrong” with it, since the price had fallen that suddenly over a period. We have seen this occur in the sovereign debt market over the past 4-5 months.

Look at your overall portfolio including stocks, bonds, cash, real estate and analyze if individually these are optimizing returns for you, especially given the market forecasts. Get financial guidance to make decisions as to how to realign portfolios in order to maximize inflows while identifying areas to reduce outflows.

Review your pension contributions. If you are deducting the mandatory 5% look to increase this incrementally to 10%. You would benefit from less Income tax deductions and increase your long term saving from your salary.

The second thing is to mentally strike off the bad investments of yesteryear. Look critically at your net worth and adjust your investment portfolio accordingly. Are there high interest recurring loan payments which could be paid down with savings to have an overall positive net worth? Or refinanced with a longer tenor to reduce the monthly payments? And as best as possible don’t incur any additional bank debt.

Thirdly, start curbing your spending now, rather than waiting until you’re forced by circumstance to do so. Cut down on unnecessary spending and use that money to fund your emergency fund. Maybe you want to put off some travel (particularly international travel since the exchange rate is so poor right now), home remodeling, a car purchase, moving, or other big expenses and instead save that money in case you need it. The less you live without now, the more money you’ll have saved if you have to go without a paycheck for a while. Those who wait until the layoff happens to slow their spending are starting from behind.

Don’t be caught by surprise. Take some steps now to protect your financial future. What’s the worst that can happen? You’ll have saved up a decent nest egg. Be prepared to look for a new job, become more self reliant, and take some steps to protect your investments.

Watch the movie, it will inspire to adjust.

***

David Weir is a Manager - Investment and Client Services with Sterling Asset Management Limited.  Sterling provides medium to long term financial advice and instruments in U.S. and other world market currencies to the corporate, individual and institutional investor.

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