Mutual Funds

7 Ways Your Money Will Never Be the Same

Brace yourself for more-volatile markets, tighter credit and a revamped retirement system.

By Jeffrey R. Kosnett, Senior Editor

From Kiplinger's Personal Finance magazine, August 2009

Investors have been feeling frisky of late. Just another bout of irrational exuberance, you ask, to be followed by another bust? Possibly. One thing that's certain, however, is that the Great Recession, the credit crisis and the past year's meltdown in financial markets will change how you handle your finances in the future. In many ways, your money will never be the same.

1. Investors: Less risk. In the old days -- before 2008, that is -- an aggressive portfolio had 80% or more of its assets in stocks. But most investors have been burned so badly that it will be a long time before they'll again be confident enough to justify such a high proportion of stocks within their total portfolio.

The new normal for an aggressive investor, for example, may be just 60% to 70% in stocks, and someone who accepts only moderate risk may be comfortable with 40% to 50%. That may not be the right way to go -- barring a catastrophe, we think stocks will outpace bonds over the next ten to 20 years. But that's the reality when a generation of investors takes such a shellacking.

2. Markets: Greater volatility. Daily, hourly and even minute-to-minute swings will continue to be wild and sometimes vicious. Experts blame the heightened volatility on a ceaseless flow of information -- or misinformation -- that can encourage misguided trading.

Enormous volumes in trading-oriented products, particularly exchange-traded funds, exacerbate the volatility (see The Perils of Leverage). That's especially true early and late in the trading day.

How to cope? Keep your eye on the long-term prize. Accept the fact that day-to-day and even minute-to-minute nuttiness has become a fact of life, and don't get caught up in it. And, says Tim Kober, of Cedar Financial Advisors, in Portland, Ore., "Don't trade in the first or the last hour, or you'll get whipsawed."

3. Diversification: More choices. The recent market unpleasantness has tarnished the concept of diversification. Nothing worked last year, save cash and Treasury securities. So much for the traditional advice to keep fairly equal holdings in various stock categories -- such as growth and value, small-company and large-company, foreign and domestic -- and to own different kinds of bonds, including supersafe Treasuries, municipals, corporates and so on. The new plan is to add a variety of investments, some of which might be considered highly risky, that really do have a good chance to zig when traditional assets zag.

That could mean putting a greater amount of your money into investments such as gold, foreign currencies, real estate, energy and other commodities. "Defense is not just diversification by allocation. It also means keeping defensive funds in the mix," says investment adviser Dennis Stearns, of Greensboro, N.C.

In the same vein, you will see a push to introduce new products aimed at immunizing you from wrongheaded forecasting or missed trading signals. The new buzzword will be buckets, or investments in which you store built-up savings to shield them from untimely losses. Some examples: annuities and insurance policies designed to lock in gains; easy-to-purchase packages of laddered certificates of deposit; and, in general, more passive types of investments with guaranteed floors and plenty of liquidity.

4. Dividends: No sure thing. There used to be an association between dividends and financial health. Companies that paid dividends consistently for many years were considered strong; even better were those that raised their payouts regularly. That's no longer the case. The recession and other developments have shown that there are few safe havens nowadays. General Electric, Pfizer, Alcoa, many other industrial companies, many insurance and real estate firms, and just about every major bank cut or eliminated dividends over the past year.

The new thinking: If a company is convinced it has a better use for its cash than distributing it to shareholders, then you shouldn't automatically punish the stock because of a dividend cut. After all, GE's stock (GE) surged 57% from February 27, when it slashed its dividend by 68%, through June 5. Shares of Alcoa (AA) have skyrocketed 85% since the aluminum giant chopped its payout by 82% on March 16.

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