Tough economy - fight back

It's been more than four years since the financial crisis first knocked you back on your heels. You've probably been on the defensive ever since, doing your best to deflect whatever punches the economy has thrown your way. Of course, the trick to any good rope-a-dope strategy is to sit back and let your opponent tire out before you unleash your own flurry of blows.
Get ready to go on the offensive. Your adversary -- the lousy economy that has battered your portfolio, home value, and net worth, not to mention your confidence -- continues to come at you but has clearly lost some of its sting.
The unemployment rate, while still high, has fallen from 10% in 2009 to 8.3%. Economic growth, while still slow, has accelerated
from an annual pace of 0.4% a year ago to 2.8%. And while the Dow Jones industrial average is still roughly 10% below where it was before the financial panic began, it's approaching the 13,000 level again.
Smart strategies from top experts on how to manage your investments, real estate, career, safety net, and savings, follow. None of these moves will undo the effects of the downturn. But they will help set the stage for your financial comeback.
Move 1. Change your stance on stocks
Old strategy: When the economy cratered, investors reacted emotionally to the market in ways that simply didn't pay off.
Best move now: Rationally reassess how much risk you should be taking with stocks based on changes in your circumstances.
Why: While only 3% of people abandoned equities altogether in their 401(k)s during the financial crisis, investors didn't exactly behave all that rationally during the downturn.
The young, for instance, grew seriously fearful, with 18- to 30-year-olds stashing more of their portfolios in cash than even baby boomers. Fund investors yanked billions out of U.S. equities in 2009 and shifted that into fixed income, only to see bonds get trounced by stocks that year. And the few brave souls who went searching for big gains raced into foreign stocks in 2009 and 2010, just in time for overseas equities to tank last year.
The moral of this story: Instead of trying to course-correct in reaction to a storm, you're better off calmly replotting your plan.
How to land this punch: Start with a range of equity allocations that's appropriate for your age. Those 55 and up will want to keep from 40% to 65% of their portfolios in stocks, says Lew Altfest, a financial planner in New York City. Younger investors should shoot for a stake between 60% and 80%.
Now consider how your circumstances have changed since before 2008. Chances are, you have a much better sense of your job security. Financial planners refer to your future ability to generate income -- and the dependability of that income -- as your "human capital," which must be factored into your asset allocation.
Economy in recovery? Not so fast
For instance, the income security that tenured professors enjoy allows them to be aggressive when it comes to equities. Work for a European bank, though, where you're one Greek default away from losing your job, and you'll want to ratchet down your stock exposure to the lower end of your range. "If you don't know where your next dollar is coming from, you can't afford more risk," says Colorado Springs financial planner Allan Roth.
You have a better sense of your tolerance for risk as well. That can also help determine whether you should be at the upper or lower end of your range. So too should your target retirement date. If you've concluded that you'll have to work several years longer than expected to recoup your market losses, "you can press the upper end of your range because you have more time," Altfest says.
Move 2. Take a calculated risk: Buy tech stocks
Old strategy: Some investors played defense and hid behind Treasuries, not realizing how expensive this security blanket had become.
Best move now: Go on the offensive by betting on tech stocks, which are cheaper than they've been in recent memory.
Why: What was safe is now risky, and what was risky has become a whole lot safer. Before the downturn, 10-year Treasuries were paying you two and half times the yield of the S&P 500. Today they're shelling out less than stock dividends. Meanwhile Uncle Sam's balance sheet is in far worse shape -- remember last year's credit downgrade?
Tech stocks have also come a long way -- but for the better since the dotcom days. The sector has become an earnings driver. Tech profits grew 20% faster than the S&P 500's last year, and they're projected to outpace the broad market again in 2012, according to S&P Capital IQ. At the same time, tech trades at nearly the same price/earnings ratio as the S&P 500, a far cry from a decade ago.
What's more, many companies in this sector also exhibit the kind of steady-Eddie characteristics that are valuable in tough times. "Tech can do well on its own," says Alex Motola, a Thornburg funds adviser. Businesses, for example, have to upgrade software or buy data storage, regardless of what's going on in the economy, to maintain and boost their productivity.
How to land this punch: Start by taking profits from your gains in government bonds last year -- Treasuries maturing in 10 years or more returned a whopping 30%. Next, trim that stake by an additional 5% to 10% -- Uncle Sam's debt now makes up more than a third of the total bond market, but financial planners recommend cutting back. Prior to the crisis, Treasuries made up only 25% of the bond market, so shoot for that target.
Use that money to boost your stake in tech. The typical domestic-stock fund that isn't a tech sector portfolio keeps about 18% of its assets in this group. Yet tech makes up nearly 20% of the broad market, and many market strategists say you can safely boost your stake to around 25% of your equities.
Blue-chip tech stocks aren't simply generating steady sales growth, they're also paying out dependable dividends. Motola likes Microsoft, yielding 2.7%. More than 80% of the software giant's sales are to cash-rich corporations, not consumers, and the company's earnings are forecast to grow more than 9% annually for the next five years. Plus, with a P/E of 11.2, based on trailing 12-month earnings, the stock is trading at a 20% discount to the S&P 500. Another good bet is IBM, with a projected earnings growth rate of around 11% and a modest P/E of 14.4.
Best bets in tech for 2012
Prefer a diversified fund? Check out Vanguard Information Technology, which owns more than 400 stocks and counts Microsoft and IBM among its top holdings. VGT charges rock-bottom fees of just 0.19% of assets.
Move 3. Your 401(k): Max it out right now
Old strategy: Maintain your contribution rate so as not to fall behind. Of course, by failing to boost their 401(k) savings, investors did fall behind as the market failed to deliver.
Best move now: Max out your 401(k) quickly -- you're running out of time, and your scorecard shows you're behind on points.
Why: If you've learned anything from this downturn, it's that you can't depend on stocks to turbocharge your retirement savings. The S&P 500 index lost ground on an inflation-adjusted basis over the past four years, just as it did in the 2000s thanks in part to two severe recessions. "The economy isn't exactly rewarding you," says New York City financial planner Gary Schatsky.
So what seems like good news -- the fact that the average worker has maintained the same 401(k) contribution rate of around 7% of pay that he had in 2007 -- actually isn't.
How to land this punch: Salaries are expected to rise 3%, on average, this year. Start there. Shift that amount into your 401(k). Assuming you were saving 7%, that brings your savings rate to 10%. You may not feel that you can do more, but test yourself.
"Raise your contributions to a level that might feel uncomfortable," says Chicago financial planner Chris Long, adding that you can always change your mind later.
Try this: Every three months boost your contribution by one point. Keep it up and your savings rate will hit 15% by the summer of 2013. Depending on your pay, that could max you out (the annual federal limit was raised this year to $17,000, though workers 50 and older can put in $5,500 more). If not, keep going and you'll reach 17% by the end of next year. Now, 17% isn't exactly a round number, but if you include a typical employer match of 3%, it will bring your overall savings rate to 20%, a good target to aim for.
How I'm easing into retirement
Why? If you're 45, earn $100,000, saved $300,000 and are socking away 10% of your pay, the chances your nest egg could survive until you're 95 would be just 56%, according to T. Rowe Price's retirement calculator. Boost your savings rate to 20%, though, and your chances of success shoot up to 76%.
Move 4. Home buying: Get back into the ring
Old strategy: Sit tight, because it could take years for the market to fully recover. In fact, there was little else you could do while housing was in a standing eight count.
Best move now: Act immediately. Use today's low prices and mortgage rates to take advantage of the still-strong rental market.
Why: Housing prices continued to sink at the end of last year, but most economists think home values will hit bottom in 2012. One sign: The inventory of homes on the market fell 9% in 2011 to the lowest level since March 2005.
Moody's Economy.com predicts that by 2015, average prices will rise 14%. "There's going to be a limited time frame for people to get a bargain in this market," says Daren Blomquist of data firm RealtyTrac.
But while buyers are coming off the sidelines, plenty of families are still content to rent or may not have adequate savings, income, or credit to qualify for rock-bottom mortgages. That, plus a tight supply of apartments, should keep vacancies low and rents high, says Brad Doremus, a senior analyst for Reis, a real estate research firm.
How to land this punch: Target investment properties in a nearby neighborhood that you're familiar with, preferably one near an employment center like a university. Make sure the rent will cover not just your loan payments, taxes, and fees, but also a 20% cushion for repairs and vacancies. And don't overpay.
Investors, who can typically close deals faster than other buyers because they often bring more cash to the deal and don't have to sell existing homes, tend to offer 10% to 20% below list price, according to Campbell/Inside Mortgage Finance.
If you're a few years away from calling it a career, consider purchasing your retirement home now -- and rent it out until you're ready to quit. Some of the most attractive retirement destinations are proving to be strong rental markets now.
Austin, for example, which made MONEY's Best Places to Retire list in 2011, boasts a favorable 4.9% vacancy rate, and rents rose 3.2% last year. While mortgages on investment properties are more expensive than loans on principal homes, you can still get a good rate -- expect to pay around half a point higher than a primary-home mortgage as long as you put 20% down and have a solid credit score.
Best places to be a landlord
Move 5. Your career: Think inside the box
Old strategy: Cast as wide a net as possible. In a lousy job market, you had no choice but to do whatever it took to find work.
Best move now: Look within your existing network. The challenge is no longer just keeping a job, it's preventing your career -- and wages -- from stagnating.
Why: Though the job market is finally showing signs of steady, if modest, improvement, companies aren't yet ready to start hiring en masse. There are still too many uncertainties in the global economy -- think Europe.
However, employers do need to fill full-time slots, and they're looking inward. "Nowadays, firms are thinking more in terms of career development and how to build the skill sets that they need internally," says Catherine Hartmann, a principal at the human resources consulting firm Mercer.
How to land this punch: If you survived the recession, you're probably managing a heavier workload with a downsized staff. Use that as leverage in negotiations for pay raises and promotions, Hartmann says. Evaluate your worth by analyzing your performance during such trying times.
"The people companies trust and value most are current employees. You want to tap into that," says Tory Johnson, CEO of recruiting firm Women for Hire.
Next, start talking. Identify colleagues in leadership positions and other key players at work and let them know that you want to be on their radar for future openings. Schedule an informal chat with an internal recruiter about your desire to move around.
Talk your way to a better raise
Finally, don't turn away outside entreaties. Working in your favor is the fact that highly skilled workers -- whose salaries have barely budged in real terms since before the financial crisis -- are starting to get feelers from competitors, says Ryan Hunt, a career adviser at CareerBuilder. So "companies will have to do more to keep their best workers," he says.
Move 6. Your insurance: Shore up your safety net
Old strategy: At a time when incomes and net worth were plummeting, households pared back on insurance -- an unsafe move.
Best move now: Make sure you have a safety net to protect against all types of risks.
Why: In the midst of the financial storm, cutting some of your insurance costs may have seemed like a necessary evil. The number of households with life insurance hit a 50-year low in 2010, according to research firm LIMRA, as families tightened their belts.
But ripping open your safety net in response to an economic crisis may have left you and your family vulnerable to unexpected life events -- like illness, premature death, or even a natural disaster.
So just as you would review how your retirement funds are invested, you need to reevaluate your insurance coverage to make sure it's not out of sync with your post-recession status. The last thing you'd want is to survive the financial crisis only to be upended by a different type of emergency.
How to land this punch: For life insurance, the goal is to make sure your spouse and kids have enough money to live comfortably and pay major expenses like college. Roughly speaking, that's anywhere from five to 10 times your annual salary.
Stopped paying your premium or lost your employer's group coverage? Then start shopping. A 10-year $500,000 term life policy from TIAA-CREF would cost a healthy 55-year-old man about $1,000 a year, a 50-year-old woman just $515 a year. Use the calculator at lifehappens.org to analyze your needs, and get quotes at Accuquote.com or Insureme.com. If you have coverage but haven't reviewed the terms lately, see whether you can get a better price.
"We've often been able to reinsure a person who had an older policy, say, 20 years old, for less money," says Alexandria, Va., financial planner Kelly Campbell.
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Households that cut back on homeowners and auto coverage need to make sure they didn't go too far, says Larry Ginsburg, an Oakland financial planner.
Can't afford to fully restore your coverage? Raise your deductible to $1,000, he says. Also, don't assume that your homeowners coverage amount should decline just because your home value has. The rule of thumb is to insure the amount it would cost to repair or rebuild your home, and that's a factor of local construction and materials costs, not market value.
Move 7. Your budget: Take a breather from cutting back
Old strategy: Slash your spending and boost your emergency fund by several months. Both moves were smart in scary times.
Best move now: You can stop cutting back now, as long as you commit to capping your spending for several years.
Why: After four years of being hunkered down in crisis mode, you can relax, within reason. The reality is, you can't chop your spending forever -- in fact, such severe austerity may eventually lead to binging. Already households are starting to ease up, as the savings rate fell from about 7% in May 2009 to 4% at the end of 2011. Of course, you don't want to see this trend continue forever either. It's time to strike a balance, says Los Angeles financial planner Justin Krane.
How to land this punch: If you're a retiree, a surprisingly effective way to cap your spending is to maintain your intended savings withdrawal rate -- just forgo making the annual inflation adjustments for the next few years, says Georgia planner Lee Baker.
A conservative approach to tapping your retirement accounts is to withdraw 4% of your nest egg in the first year, but to boost that initial amount in subsequent years to keep pace with inflation. Skipping inflation adjustments, though, can help mend a damaged portfolio.
T. Rowe Price found that if you retired in 2000 with $500,000 and used the 4% rule, your strategy at the end of 2010 would have had only a 29% chance of surviving a 30-year retirement. Had you taken no inflation adjustments in the three years after each of the past two bear markets, though, your chances of success would have shot up to 69%.
Workers can try something similar. Over the next several years you're likely to start collecting raises again. Yet you've proved that you can live on your current spending. So let's say you make $100,000 and "spend" 80% of that (including taxes). Well, if you get hikes of 3% a year for the next five years, your salary would climb to $116,000. Rather than spending 80% of that, though, stick to the original $80,000 budget, plus the additional amount you pay in taxes.
Best New Money Moves
That won't be nearly as hard as cutting your spending was at the onset of the financial crisis. Then again, the times aren't as tough either. And small moves like this will surely help you go the distance.
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