On a beautiful spring afternoon, just a few weeks before we received our high school diplomas, my friend invited me to go flying with him. He had just qualified for his private pilot license. We took his green Chevy Vega to the small municipal airport. He went into the office to finalize arrangements and before long we were flying. Listening to the tower at Portland International Airport just across the Columbia River, we knew a commercial airliner had started final approach. Since my friend’s license allowed him to operate only under visual flight rules which made him responsible to “see and avoid” potential hazards, and since we could not visually see the incoming plane, he said “Let’s get outta here” and banked the small plane to the north.
In contrast to that afternoon excursion, an instrument flight rules rated pilot can navigate an airplane when surrounded by clouds or darkness. A pilot with an instrument rating learns to trust the gauges and dials in the cockpit, even when it doesn’t feel right. Pilots deprived of an external visual horizon sometimes struggle with spatial disorientation. Changes in the airplane’s orientation to the earth may go undetected, but the shift of a degree or two could have serious consequences over time. When flying in the clouds a pilot must trust the instruments.
We’ve been flying in the clouds during the current financial crisis. Recent reports indicate stock market wealth dropped 39.9 percent in 2008. Since my primary retirement savings was 100 percent in stock last year, the decrease in my account’s value matched that figure. The Federal Reserve recently reported that in 2008 the net worth of families went down on average 17.9 percent. We did a bit better, just a 16.1 percent decline in value, but it still eliminated the gains made over the past four years.
Average household real estate decreased 10.5 percent in value; we held up a little better with just a 5.9 percent drop. Average equity in an owner occupied house is 43 percent; we’re at 49 percent. Job loss touched our family in 2008 when our daughter joined the unemployed. My wife and I will have less income in 2009 because of salary reduction and less income from writing and speaking. We’ve had plenty of financial clouds.
Like a pilot who has learned to trust the plane’s instruments in spite of what seems right to the senses, so the investor must learn to stay with the financial plan even when it doesn’t feel so good. Because I stayed invested in stocks, I benefited by what the Wall Street Journal on April 3, 2009, called the best four-week streak since 1933. A few months earlier a friend transferred money to a “safe” investment and missed this opportunity.
Throughout the financial crisis I have continued making contributions to my retirement account. As the prices decreased, my regular contribution bought more shares in the mutual fund than when its net asset value was higher, and I’ll benefit from those additional shares when the market improves. I reviewed our asset allocation, that is, how our investments are distributed among various options, and made a few adjustments given current circumstances.
So what are the instruments to monitor while flying through financial clouds?
First, consider how much you have set aside in case of emergency. Financial planners recommend having three to six months of living expenses readily available. That was a stretch for us while our children lived at home, but now we could go for more than a year if both of us were unable to generate income. If you don’t have an emergency fund, start now to build one, even if you begin with putting away just a few dollars a month.
Second, consider how much you invest for retirement. Saving at least 10 percent for future needs is a worthy goal, but do something even if you start small. I started at $50 a month; in 2008 we saved 19.4 percent of income for retirement. As an expression of our contrarian nature when it comes to investing, we recently upped the percentage of our monthly contribution to our retirement accounts to help us recoup what we lost this past year.
Third, consider how much you give way. It would be easy to eliminate contributions to churches and other worthy causes during an economic downturn, but this goes against the generosity that Scripture says should mark the follower of Jesus. When I did our income taxes, our total contributions surprised me. We were not motivated by a goal beyond the tithe, but simply responded to opportunities as we were able. We’ve gone through an IRS audit where the first question probed whether the church required large donations as a condition for my employment as a pastor. I thought at the time that the IRS agent didn’t understand Christian stewardship.
A qualified pilot can safely guide a plane to its destination, even through clouds which obstruct the view. Personal finance in troubled times is similar. Sometimes it’s necessary to ignore the financial clouds and concentrate on basic principles while waiting for the sunshine of a new day.