Tips to Weather Tough Financial Times

By James Eccleston

INRA (the Financial Industry Regulatory Authority) has published, "Weathering Tough Financial Times: 9 Tips for 2009." It is a helpful roadmap for saving, investing, and taking some precautionary measures to weather the tough times. Let's examine the regulator's tips.

First, FINRA urges individuals to pay down credit card debt. This is sound advice because of the high costs that banks are imposing, both in terms of interest rates (that banks continue to increase) as well as late fees. FINRA also points out that banks are reducing credit limits on credit cards, and that "lower credit limits can also mean lower credit scores if you don't pay down your credit card balances."

Second, FINRA reminds individuals to check their credit report. One needs to check to ensure that the credit history is accurate, correcting any inaccuracies. FINRA references 877-322-8228, and www.annualcreditreport.com to obtain a free credit report.

Third, FINRA recommends establishing a "rainy day fund." In tough economic times, that can be difficult, but if possible set aside 3 to 6 months of current salary. FINRA recommends placing the fund in an insured savings account and not withdrawing the money unless there is an emergency.

Fourth, FINRA cautions individuals not to raid their 401(k) accounts. FINRA cites a disconcerting statistic: one in five workers over the age of 45 stopped saving for retirement in 2008 because of the economy. FINRA urges individuals to reduce spending wherever possible to avoid the harmful effects of reducing 401(k) contributions or borrowing from the 401(k) plan.

Fifth, FINRA suggests that individuals reduce investment risk by allocating their investments among the different asset classes - stocks, bonds, cash, and so forth (and then diversifying within those asset classes). This is critical. Indeed, FINRA recommends that investors whose investments declined by more than the broad market indices (such as the Dow Jones Industrial Average) revisit their accounts to implement appropriate asset allocation (and diversification). Moreover, investors who needed safety and/or income from their investments should not even have suffered losses equivalent to those associated with the broad market indices. That would be a "red flag" that the investments were unsuitable.

Sixth, FINRA recommends opening and reading investment account statements. This can be emotionally difficult, and statements can be difficult to understand. But make the effort, especially in a volatile, bear market.

Seventh, FINRA points out that fees matter. Every investment costs money, directly or indirectly. Find out what that cost is, because "the higher the fees and expenses, the less real return you make." FINRA also suggests comparing the fees and expenses of different investments. For example, it is wise to compare the cost of a mutual fund to the cost of an exchange traded fund (ETF) and the cost of an exchange traded note (ETN). To do so, FINRA provides a "Fund Analyzer" on its website, www.finra.org.

Eighth, FINRA urges individuals to protect themselves against identity theft. FINRA notes that "phishing" attacks surged 103% in October, 2008 following the stock market drops. That is because any news, good or bad, can become a "hook" for a new scam. For example, FINRA reports that fraudsters exploited news of bank failures as a hook to obtain personal information.

Finally, FINRA recommends investing for the long term. FINRA repeats the advice of many financial advisers not to jump ship based upon a short-term outlook. That is sound advice, so long as individuals indeed are long term investors. On the other hand, individuals who need safety, income or access to some or all of their investment funds within 5 to 10 years or so cannot rest so easily. Diligence, by the investor as well as the financial adviser, is necessary to ensure that investments are and remain suitable to meet the investor's goals and risk tolerance.

FINRA's 9 tips are helpful advice. Investors (and their financial advisers) would be well-served to follow that advice!

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About the Author:
James J. Eccleston is the president of Eccleston Law Offices, P.C. The Chicago-based firm represents investors and advisers nationwide in securities and employment matters. 312-332-0000 www.EcclestonLaw.com.