| Depression is treatable if markets are the cause | |
| COMMENTARY | | John F Wasik / Bloomberg December 23, 2008, 0:10 IST | |
A financial adviser telephoned Mitch Anthony to report she was coming out of her depression.
In a year of seemingly endless bad news and bad acts, she was feeling more assured after hearing Anthony, a Rochester, Minnesota-based counselor to financial professionals, discuss the need for truth between investor and adviser.
“A lot of people aren’t sleeping at night,” Anthony told me, “but there is an upside to this. It’s a bull market for building relationships.”
It’s time to confront an ineluctable moment of truth when someone in your financial life has betrayed you. The alleged $50 billion fraud of New York money manager Bernard Madoff culminated a year-long deflation of the trust bubble.
To Anthony, pressing your adviser to keep you informed about your financial condition isn’t enough. You also need to reflect on your own feelings about money — your “fiscalosophy.”
“Stay focused on what you can trust and control,” he advises. Stop worrying about the markets. Turn off the television, which is gearing its programming around panic and fear. Re-vet your life financial plan. What works? What doesn’t? What’s tangible and what’s illiquid? What’s changed? How do you need to adjust?
Trust is essential in developing your fiscalosophy, and there’s nothing more productive than being honest with yourself. Will you be able to work longer to afford retirement? Do you need to go back to school to improve your skills and knowledge? What have you really lost? How long will it take your portfolio to recover? Do you have time left?
Questions to ask
You also need to be forthright in deciding whether you got bad advice this year. Here are a few year-end questions to help calibrate your trust gauge:
Do your broker, insurance agent and/or adviser have your best interests at heart? Were they selling you products just to earn a commission or truly crafting a risk-conscious financial plan?
Is your adviser a fiduciary? That is, could you sue if the adviser compromised your financial well-being by putting commissions above your security? Most brokers aren’t sued because they make you sign an industry-mandated arbitration agreement. The best advisers are fiduciaries who disclose all conflicts and fees. While this is no guarantee against fraud, it’s a more pro- investor business model than the broker-dealer.
Do your adviser’s principles coincide with yours? Does the adviser accept too much risk, or not disclose it? Disclosure was a major factor in the auction-rate securities scandal, in which investments were falsely peddled as if they were cash- equivalent money-market funds.
Control spending
While much of the focus was on the calamitous credit, housing and stock markets this year, personal spending was often ignored.
During the easy-money years prior to 2007, too many people adopted a McMansion mentality and went deeply into debt with oversized homes, big-screen TVs and other consumer items. They even borrowed against their homes to pay for what they couldn’t otherwise afford.
“We may be the first generation of dyed-in-the-wool consumers,” Anthony says of Baby Boomers’ propensity to spend rather than save. “What would our grandmothers say? We need to talk about our spending problem. What have we learned?”
Anthony cites three durable rules that remain relevant in the face of a global financial crisis: “You will do well if you spend less than your income, save as much as you can and don’t do anything stupid.”
Market myths
In recent years, those truisms were eclipsed by market myths — that home values would continue rising far faster than income growth and inflation, that the stock, bond and mortgage markets were becoming less risky even in the face of massive speculation, hedge-fund trading and derivative activity.
Many bought these myths lock, stock and barrel, ignoring their need for financial security in the process.
My best source for financial sanity comes from Polonius in Shakespeare’s Hamlet: “to thine own self be true.” Translated into a mantra for financial sanity that becomes: “Listen to your inner grandmother.” If investment returns sound unrealistic, avoid them. If you don’t understand what you’re buying or can’t afford losses, the decision should be easy. Lower your debt burden. Refinance your mortgage if you can.
Wait for rebound
For those who are still believers in capitalism — and I am one — you can wait for markets to rebound, if you have the time. If you don’t, stick to US Treasury securities, inflation- protected securities and highly rated municipal bonds.
You can choose to be depressed, pine over your losses and become a financial ostrich, hiding from the reality that markets are often cruel.
(John F Wasik is a Bloomberg News columnist)
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