So lets say you have a 401(k) and are adding to it regularly, you own your house, you have no credit card debts, you are paying off your car loan and overall your financial house is in fairly good order. Still you keep hearing the news about credit crisis, mortgage meltdown, dollar depreciation… It is enough to make you nervous but what should you do?
Frankly very little in the macro economy has much impact on what is a smart long term strategy. Should you move your retirement money into a money market fund, because of the risks of stocks now? No. If you are good enough to time the market you are already amazingly rich (or will be soon). But either no one is able to do this or next to no one is. Occasionally you might get lucky and time things right but being able to consistently do so over 40 years is just not something that happens.
So what you should do now is what you should always do. Have cash savings. Pay off your mortgage (don’t over-leverage yourself – don’t take out equity just because you have some). Save for retirement. Have health insurance. Don’t take on credit card debt (or most other debt). Keep up your employment skills (learn new skills…). Diversify your investments (stocks, international stocks, real estate, cash…).
People often get careless when the overall economy is good. And so maybe you failed to do what you should have been doing then. But the right thing to do today is essentially the right thing to do always. For example, Americans are drowning in debt. They were also drowning in debt 3 years ago. That problem is the same. If you have too much debt you should fix that. Not because of all the fear today, but because to much debt is always bad. You should not take out too much debt in the first place and if you have to much you should fix it whether the economy is strong or weak.
Another mistake made by many in the USA is too little international investments. The falling dollar and risks to the USA economy make it more visible but it has been true for at least the last 30 years that it makes sense to invest globally.
There is one macro economic factor that does make me adjust long term investment plans. Long term interest rates are much to low to compensate for the risk of rising inflation and interest rates, in my opinion. So I would have either no (or very limited) long term bond exposure. Of course, I have felt this way for many years now. But I just don’t see long terms bonds as a worthwhile risk for the payoff. If things change a great deal then a small portion may be fine – pretty much all the time I advocate less than the conventional wisdom to long term bonds.
I would probably also not be in a hurry to buy a house if I was in the market. I would look for a great deal. If I could get one today I would have no problem buying. But I would also guess that I am not going to be hurt by the overall market by waiting (whether that is a few months or a year or two). But at some point the market will turn and it will likely catch everyone by surprise. Trying to time the bottom will most likely be hard.