Your Best Tactics for Tuesday after Market Mania on Monday

September 16, 2008 by  
Filed under Financial Planning, Investing

Use Bad Financial News as a Catalyst for Evaluating Your Money Strategies and Tactics 

If you read about Mr. ToughMoneyLove, you know that I am a baby boomer and self-proclaimed money strategist.  Being a money strategist includes facing up to hard truth in the form of bad financial news.  I use such news as a reason to re-assess the money strategies and tactics that support the financial goals my wife and I have established.

Monday, September 15, 2008 – some are calling it “Manic Monday” – had plenty of bad financial news, starting with the largest bankruptcy in U.S. history which triggered a precipitous drop in the market.  On top of this, gasoline is in short supply at the retail level.  If we lived on the Texas gulf coast, it could be even worse. 

So, I have decided to label September 16, 2008 as “Tactical Tuesday.”  What follows is a summary of the tactical money moves I have made in response to “Manic Monday” for your consideration and critiques. 

The Mr. ToughMoneyLove Tactical Money Moves

Review and Confirm Non-Correlation of Retirement Portfolio Asset Allocations

Our retirement portfolio is allocated among ten different asset classes inside my 401(k) plan and our IRA’s. (The IRA’s are non-deductible IRA’s which I intend to convert to Roth IRA’s when the window opens to higher income earners in 2010.)  Our portfolio is designed to be an all weather portfolio.  One of the important features of such a portfolio is non-correlation of the asset classes.  In times of extreme negative market moves such as what happened on “Manic Monday,” I expect most of the asset classes to go negative but not to the same degree.  I also expect that some asset classes may show positive movement due to the nature of the market mania.  That is what happened with our portfolio.  Eight of the ten asset classes went negative in varying amounts.  Two asset classes (inflation protected securities fund and foreign treasury bond fund) showed positive movement.  

This confirms my belief that our allocations are functioning as intended and that we should stay the course.  Meanwhile, it was and is my plan to re-balance in November using funds that have been accumulating in a stable asset value fund inside my 401(k).  Depending on what the fed does with interest rates, what the inflation indicators are showing, and how the equity markets are performing at that time, I may increase our allocation in inflation protected securities.  

Unlike some folks, I do not plan on investing in gold, for reasons I have explained in an earlier post.

Check Investment Exposure to Negatives Associated with Failed Investment Banks 

Most of our investments are in index funds.  We own some individual stocks for their dividend yields.  Earlier this year I sold our Citi and WaMu stocks based on negative outlooks in the financial sector and on a drop in their dividend payouts.  If I owned any managed funds, I would be studying the portfolios of those funds to see if any of them were over-weighted in financial and insurance stocks.  If so, I would consider selling them now and moving those funds into a different asset class. 

If we had investments in a small sector REIT or specialized REIT fund, I would check to see how exposed that investment was to the Manhattan real estate market.  With the Lehman Brothers bankruptcy and Merrill acquisition by Bank of America, two things are going to happen in very short order.  First, a lot of Class A office space in Manhattan is going to be vacant.  Second, many high earning employees of Wall Street firms are going to be out of work.  These events will depress the commercial and residential real estate markets in New York City.  I would not want to own a REIT that was heavily invested in properties in that market.

Confirm Safety of Investment and Deposit Accounts 

I see no need to be concerned about failures of any institution holding our retirement and taxable investment accounts.  First, all institutions holding investment accounts are under strict legal requirements for separating invested funds from operational funds.  Second, the SIPC provides protection for retirement accounts at member brokerages.  All of our investment accounts are at member brokerages.  

I also did searches inside Google Finance and at Bloomberg for any negative news reports pertaining to institutions where our accounts are held.  Nothing to worry about there.

I also checked the “safe and sound” ratings of our financial institutions at bankrate.com.  We are in good shape there as well. 

Finally, I confirmed again that our bank deposits are properly distributed and named between me and my wife so that the FDIC will protect all of them in case of a bank failure. 

Review Allocation of Cash Deposits and Cash Equivalent Assets 

We have accumulated cash and cash equivalents in I-Bonds (for tax deferred cash needs in the retirement phase) and in Internet bank savings accounts and CD’s (for paying off our mortgage).  If I were considering additional CD purchases at this time, I would move quickly to capture the best rates before the fed lowers interest rates again, which could happen very quickly. 

I will be watching interest rates at our Internet bank accounts.  If they drop in response to any fed action this week, I will consider moving some of them to an online account at a community bank paying a higher interest rate.  I may also move into a tax free municipal bond fund because of their relatively favorable current rates. 

I am not buying more I-Bonds at this time but will re-consider November 1 when the interest rates are adjusted. 

Review Safety of Insurance Policies and Coverages 

With the precarious position of insurer AIG prominently in the news, I reviewed the stability ratings and related news for the companies from which we have purchased disability, health, auto and life insurance.  The easiest place to do that is at A.M. Best Company, the industry leader in insurance company ratings.  We do not have any insurance from AIG but if we did, I would be looking for a back-up plan right now. 

This summarizes Mr. ToughMoneyLove’s tactical money moves to date in response to Manic Monday.  What have I overlooked?


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