American Investment Services, Inc.

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Dec. 2001 – Coping with Recession

During the sustained boom times of the 1980s, many people may have come to believe that there was no need to prepare for “tough times.” The 1990-91 recession was a harsh reminder that prosperity is not guaranteed, and that it is prudent to save for the proverbial rainy day. More recently, the belief that technology and the globalization of markets have ushered in a “new economy” has fostered the notion that business-cycles were a relic of the “old economy.” The stark fact is that if you lose your job during a recession and have no savings on which to draw, you probably will have difficulty making ends meet, even if you qualify for various Government unemployment and welfare benefits.

Personal Implications of Recessions

The personal effects of recessions are potentially devastating. Layoffs and firings can cut or wipe out earned income, deplete family savings, force the “distress sale” of assets, lead to default on debt, and, in extreme cases, to bankruptcy or even homelessness. Even under less severe circumstances, recessions often force families to alter their lifestyles to some degree. Discretionary spending may be cut. Or plans for college, travel, or retirement may have to be abandoned or adjusted.

In this respect, the advice given in the popular press to help the victims of a recession cope tends to be “too little too late.” Most personal financial affairs columns dispense generic advice that probably is painfully obvious to those who have lost their jobs. Readers are encouraged to work hard at their jobs to reduce the chance of being fired. They are told to build their savings with the aim of accumulating funds to finance household needs for between three and nine months. And they are advised to “get control” of their debt by paying off credit cards and budgeting family expenses. While this is good advice that ought to be followed at all times, it scarcely helps those who have not practiced it before the need arises.

On the other hand, you can take a number of steps to get by should your income drop markedly. For one, you should separate your expenses into necessary and nonessential items. Anything that does not contribute directly to your daily maintenance or family protection—mortgage or rent, utilities, car loan, gas, food, clothing, life and health insurance—should be considered an extra that can be postponed until your income is restored. The latter includes payments on credit card and other consumer debt. If you do not pay those bills, you will damage your credit rating. But that is better than going without shelter and food.


Also in This Issue:

Passive Investing: An Overview
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield