Keeping Your Head Above Water While Watching the Economic Wave

Sometimes, at certain points in an economic wave, we see a frenzy of unwise financial behavior. Overconfidence, underconfidence, neighbor envy, media overload, all add to a lack of wisdom. How do you keep your head about you?

Waves are hypnotic. The simple up-and-down motion has kept us watching for millennia. There is one moment that still sometimes makes us catch our breath: The sheet of water goes up, gets thin enough for the sunlight to sparkle through, and then crashes down.

The economy has its own wave structure. Look at any stock market graph for a moment and you might be tempted to surf it. From the troughs to the peaks, the up-and-down is a sure thing (we just don’t know when it will happen). We can also watch for that just-before-the-breaker moment when the height of a wave becomes too thin to stand for long — when the crash is coming.

And then it came. No one could have predicted the coronavirus and the changes it would bring, and now a lot of us are soaked.

Let’s stop and look at this economic wave for a moment — some indicators of how high and thin it was before this recent downturn, and the wise course to take for us as investors and money-smart people.

Wavelength Indicators

I should say at the outset here that I’m not looking at macrotrends, but individual behavior. Macroeconomic indicators, such as the inverted yield curve, are well documented as harbingers of a wave crash, but habits of everyday investors are what these currents are made of.

Increased Personal Loans

From what I’ve seen, consumer “impulse” item loans were on the rise. The speedboat, the extra trip, the unnecessary house addition are all loans that signified confidence. Before COVID-19, I wouldn’t have been surprised to see these continue to increase this year. In some ways, this indicates a healthy economy and a solid rise, but it most likely indicates overconfidence.

Over the next few months it’s likely we will see this overconfidence backfire. Income for some evaporated overnight. The market dropped and that brand new boat will now be listed for sale at a deep discount.

Those of you who controlled your keeping-up-with-the-Joneses desires now will have deep discounts everywhere. Finding those areas that are real opportunities can mean riding the wave to substantial growth in the future.

Houses Selling Like Crazy

One of the largest loans that most of us will interact with at least once in life is a mortgage. If we don’t think housing finance can be indicative of an economic trough, then we need to take a time machine back to late 2007!

Real estate has always remained a relatively stable investment. That’s probably not going to change much, but the thing to watch is bank and investor behavior around housing. If housing loans are on the rise, that can mean a certain over-comfortability with the economy, a kind of hubris that can be brutally punished.

Frenzied real estate sales also point to easy loans — low interest rates given without proper due diligence. Multiply that by a few million, and that’s a lot of uncertain money at play in the economy.

Most recently, mortgage rates went down and then instantly went back up. As policymakers take steps to spur economic activity while COVID-19 otherwise stunts the economy, many homeowners sought to take advantage, applying for refinancing. After loan officers work through the application backlog, rates are likely to drop again. Keeping an eye on refinancing rates could mean extra cash flow and big savings on interest payments for you.

Setting Up Collateral Loans

As the head of an advisory team, close to direct contact with clients, I had seen an uptick in requests to take out loans against investments. How can I grab some cash without having to actually sell anything?

This speaks to me as classic “top-of-the-wave” behavior: taking out non-cash loans against non-cash items. Much of the time, this kind of loan is taken out to fund a venture that’s not yet making money. In some ways, this kind of risk is at the basis of our economy, but again multiply that by a few million and the uncertainty goes up exponentially.

The Backyard Barbecue and the Tulip Startup

The fact is that a lot more of our financial decisions are made at the backyard barbecue than they are in the library reading The Wall Street Journal. At the barbecue, a few beers and burgers in, the fundamentals of the economy don’t seem very real.

When your friend from work starts telling you about a killer startup you just have to get in on, or an extra vacation or cheap flights, it can sound tempting. Or your friend shares bad news and you panic, making a run on hand sanitizer and toilet paper or, on a larger level, pulling some investments. Money goes in and out too quickly.

Add to that the up-to-the-minute notifications on your phone, a 24-hour news cycle, social media and all the other distractions of modern life. You can find yourself in the middle of unwise decisions before you know what’s going on.

The tulip craze in 17th century Holland is the well-documented first account of an economy wave crash. In short, people went crazy for tulip bulbs, which were a fairly new trend in the area. Their value would jump overnight, and people would trade houses and land for just one bulb, because the investment seemed so certain.

Enterprising investors stockpiled tulips and sold on speculation and day-trading over the bar at the local tavern (the equivalent of today’s backyard barbecue?). Layers of speculation and non-cash agreements made for what we today recognize as a bubble, which burst brutally, leaving stockpiles of flowers that were near worthless.

So the term “tulip mania” was born to describe the financial bubble/wave/balloon phenomenon. Too much speculating, too little due diligence, and that first wave crash was born in history. People went all-in on what looked like a sure thing. A few centuries of cultural and financial cynicism have followed, but we still find ourselves tempted by the “tulip market.”

It Comes Down to You

Now, I can show you trends and data for the last 50 years. I can pummel you with terms and sensational numbers to show you how much you stand to lose. But the first thing to do is orient yourself. Look above the waves for a minute.

Time Horizons

I’m not afraid to admit that I just bested 40 years old. I have a healthy 401(k), IRA and other portfolio investments. The headlines, whether they are preaching foolhardy investments or sensationalized doom and gloom, aren’t helpful for this part of my investment life at all.

The earliest I will need to start using that money is 2040. Think about that — that’s two decades away. The average recession lasts roughly 11 months, and the average person might see at least a handful of those in a lifetime. I realize that’s my own personal example, but how many of us have a similar story?

Don’t entertain two bad options. The first being: Pull everything out at the first sign of a crash. You could lose a lot when the wave comes back up, especially if you don’t need those funds for a decade or two. The second being: Go all in. Take loans out against loans and put your money into shiny, new investments that have yet to show if they’re seaworthy. You could lose even more — end up with a basement full of dead tulips.

Update Mania

You’re probably reading this article on the object at the center of most financial frenzy — your phone. There are literally thousands of apps available for your phone that can send you market updates every hour on the hour if you want them.

Many of us will swipe them away quickly, but the information still finds its way into our brains, even passively.

My strategy: Drop the alerts. Uninstall the mania. Up-to-the-minute financial “news” will do nothing but make you nervous, especially if you’re in the wealth-building part of your journey like I am. Rather than checking your investments every week, make it once a quarter or once every other quarter.

If you’re concerned about the impact of COVID-19 on your portfolio, reach out to your financial adviser. You’ll likely hear that professionally built portfolios are built to weather a bear market — we’ll all see more than a few in our lifetime.

The macrotrends you can’t control, but the microtrend — your own bearings and behavior — is well within your grasp. Keep calm, carry on and tune out the noise.

Securities offered through Cetera Advisor Networks LLC, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera Advisor Networks LLC is under separate ownership from any other named entity. Carson Partners, a division of CWM, LLC, is a nationwide partnership of advisers.

About the Author

Erin Wood, CFP®, CRPC®

Senior Vice President, Financial Planning, Carson Group

Erin Wood is Vice President of Wealth Planning at Carson Group, where she develops strategies to help families achieve their financial goals. She holds Certified Financial Planner and Chartered Retirement Planning Counselor designations.

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