Financial experts: Pay down debt, boost savings

It’s hard to make sense of the turbulent stock market and economy.

One day, the Dow Jones industrial average plunges through the floor. The next day, it’s back up. You work hard for your money, but lately that hasn’t been a two-way street.

The little voice in your head says you better do something about your investments. But what?

Experts say you shouldn’t rush into things when it comes to changing your investment strategy. Take a deep breath. Think about your financial goals.

We asked three financial planners for advice for people in three basic categories: young families just starting out, empty-nesters close to retirement and small-business owners.

The three financial planners are James Dailey, the chief investment officer for Team Financial Services; Jeffrey Roof, the president of the Roof Advisory Group; and Robert Spangler Sr., an independent financial adviser. All are based in the Harrisburg, Pa., area.

Advice for everyone:

All three planners have at least one kernel of wisdom that applies to all groups of investors:

Good financial planning at a time like this means eliminating as much debt as possible and increasing savings to provide a cushion, Dailey said.

Keeping your job is imperative, especially for younger people.

It is critical that any investor know his or her long-term goals, Roof said.

“It’s really matching the strategy with the purpose of the dollars,” he said.

If you don’t have an investment adviser, you should get one, Spangler said. He conceded that such advice is self-serving and that advisers cost money that you could save or invest.

But investing today “isn’t something you do yourself,” he said. “It’s too complicated. It’s like going to a doctor when you are sick or to a dentist to get your teeth fixed. You don’t want to do it yourself.”

Young families with kids

DAILEY: Your biggest worry isn’t the stock market. You have plenty of years to invest and to recover from this downturn, even if it lasts a few years.

Your biggest asset is your ability to work and provide income to create wealth. If you have a good job, do what you can to keep it.

“If the economy continues to deteriorate, the likelihood is significant job losses, so job insecurity is a major threat,” he said. “Value job security at a premium over job satisfaction for the time being. Hang in there for a while.”

Dailey recommended having savings equal to at least six to 12 months of income, even though he knows most people don’t. Cut spending and save as much as possible, he said.

If you have extra money to invest, Dailey recommended you put the money in a place where it is safe and available, such as an account insured by the Federal Deposit Insurance Corp. or a money-market fund investing in government-guaranteed instruments.

ROOF: Don’t rely on the stock market for money you expect to need for big purchases during the next five to seven years, such as a house. Money-market funds and bank certificates of deposit are better choices. The money you invest in the stock market now is to meet your long-term needs and goals, looking at least 20 years down the road.

Take a big-picture look at your financial priorities. What money do you need today, and how much over the next five to 10 years and later? The answers to these questions should drive your investment strategy.

SPANGLER: If you have cash to invest and have a long time frame — say 30 to 40 years — continue to make steady investments in the stock market over time, through such devices as a mutual fund or a 401(k). Don’t invest money that you need for living expenses today.

Empty-nesters nearing retirement

DAILEY: You should be able to look back 10 years and know exactly how your investments have performed. Knowing past investment performance is part of knowing what, if anything, you need to do today and in the near-term future. If your strategy hasn’t enabled you to gain much in the stock market over the last decade, don’t count on doing any better using the same strategy over the next few years.

If you are close to retirement and have a large amount of your portfolio in stocks, talk to a financial adviser about reallocating some of this money to act as an insurance policy to protect you when the market tanks.

ROOF: Know now how much income you will need to live on during retirement. An investment strategy that just gets you to retirement isn’t enough. You need to get through retirement.

“If you retire at age 62, with a life expectancy of 85 and up, you can’t put it on autopilot for 20 years. It needs to be managed very carefully” throughout your retirement, he said.

Don’t have all your investment eggs in the stock market or in any one basket. Diversification is an important investment tool at any stage of life, and it becomes “paramount” as you near retirement, Roof said.

You should know exactly what you are investing in.

“People assume bonds are a safe investment. They are only as safe as the companies backing them up,” Roof said. “This whole credit crisis has put a strain on many financial service companies, and they are big issuers of bonds.”

If your mutual fund is investing in bonds, know what type of bonds it is investing in.

SPANGLER: Reduce your reliance on stock market investments as you near retirement. Look for investments that are relatively stable, such as an international bond fund or money market. You might not get as high a rate of return, but your investment won’t decline as much, and that’s a victory now.

“Just to maintain a balance without gaining could be a good thing in a market that is going down” 20 percent to 40 percent.

Small-business owners

DAILEY: Do what you can to reduce debt and your need for outside capital. Rely on your own cash flow as much as possible. Know your bank’s financial health, especially if you have one or more accounts with more than $100,000 on deposit.

The FDIC insures most bank accounts up to $100,000. (Under the bailout legislation signed by President Bush on Friday, the insured amount temporarily rises to $250,000.)

But if your bank goes under and your money is lost, even if your account is insured, it could take six months to get this money back from the government, Dailey said.

“To a small business, that is death,” he said.

ROOF: Business and personal assets end up being closely aligned. Don’t have all your investments tied up in your business, especially as you near retirement. Small-business owners should explore ways to increase the percentage of their investments that are outside their personal business umbrellas.

“Having too much of a concentration in a single business ends up being a very risky strategy,” Roof said. “Talk to the employees of Lehman Brothers and Bear Stearns who had significant dollars tied up in their own company stock.”

SPANGLER: Be prepared to hunker down and, to the extent possible, depend on your own future revenue for the next few years. There are exceptions, but for most small businesses, now isn’t the time to go out and expand.

Instead of buying a new truck, get the old one fixed. You might even need to lay off some employees to reduce costs and avoid more debt.

“This might be a period where you have to go backward for some businesses and not forward,” he said.

Spangler also warned owners about trying to keep their businesses going by borrowing on credit cards. These owners are betting on future revenue and a quick turnaround in economic conditions. But for most businesses, that isn’t likely, and the economy is heading into a downturn that might last several years.