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Saturday, April 22, 2006 - Page updated at 12:00 AM

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The sky isn't falling

Special to The Seattle Times

Hardly a day goes by without some piece of alarming global economic news. Recent months have brought us such nail-biters as terrorist attacks, fears of avian flu, skyrocketing oil prices, the Iraq war's soaring cost, pension plans going bust.

It's enough to make you want to spend like there's no tomorrow — or stuff your money in your mattress and then crawl into bed.

And that's what plenty of Americans are doing — the spending part, at least.

Time to get a grip.

Financial experts say most people should worry less about the things they can't control and more about how much they're saving. Bad stuff will happen, but it's difficult to forecast which of those dark clouds on the horizon will turn out to be a cyclone.

While we fret, Americans' personal-savings rate has hit a record low of minus 0.8 percent. Not good.

To secure your financial future, you've got basically two choices: Save tons of money or grow your money faster than inflation. Choice No. 2 means taking some risks with your cash — global catastrophes or no.

So here, we'll hold your hand as financial experts tackle some of the scary questions for nervous savers.

SCARY POSSIBILITY NO. 1

Q . How can someone who's worried about international issues — say, the possible rise of China as the future pre-eminent world power, or a decline in U.S. economic might — make any financial moves?

A. Remember, it's hard to predict how another country will fare over time. In the 1980s, forecasters thought Japan's booming economy would soon eclipse our own. Didn't happen.

Though some may worry about China eclipsing the U.S., given the country's penchant for periodic repressive crackdowns, an economic bust in China is as likely as a boom, argues Harold Evensky, Miami-based editor of "The Investment Think Tank" (2004, Bloomberg Press).

For those worried about a U.S. economic decline, Evensky suggests investing in foreign stock funds, which often rise when U.S. stock markets are sinking.

The main thing to remember is that no matter what happens to the U.S. economy, you're going to want to retire, says South Seattle Community College financial-planning instructor Bob Davis. So keep saving.

After Great Britain declined from its status as top world power, he points out, the country's citizens still wanted to retire when they got older. They still saved money and invested it in stocks and bonds to make that possible.

Spreading your savings among the four major categories — stocks, bonds, cash and real estate — is the time-tested way to soften the impact of unpleasant economic surprises.

SCARY POSSIBILITY NO. 2

Q . Could another domestic terrorist attack trigger a stock-market crash?

A . Terrorist attacks can cause market downturns. But data from 20 years of past major events shows the stock market generally bounces back pretty quickly, says financial instructor Davis. The trick is not to panic and sell when the market tanks.

After both the stock-market mini-crash of 1987 and the Iraq/Kuwait war, the stock market recovered most of its lost ground within six months, he notes. It took several years to bounce back after the Sept. 11, 2001 attack, but now the Dow Jones Industrial Average, often used to gauge how the U.S. stock markets are faring, is higher than before the attack.

Since most people who put retirement money into stocks are planning to hold them for the long term — and even a 60-year-old retiree should plan to own stocks for decades to come — such temporary market setbacks shouldn't have much of an impact on their savings in the long haul.

SCARY POSSIBILITY No. 3

Q. Social Security and pensions appear to be in jeopardy. How can we plan?

A . If you're young, expect Social Security to kick in later and pay out less than promised right now, advise experts. Most believe, though, that the plan will survive in some form. So save more, or prepare to work longer.

If you're nearing retirement age, you likely won't see any change.

Watch carefully plans for proposed changes to Social Security. "Most of the proposals to fix it are going to harm people more than any likelihood that the system is broken," says Randall Dodd, director of the Financial Policy Forum in Washington, D.C., which evaluates financial-market stability.

News is indeed scary on the pension front. With even flourishing companies such as IBM phasing out their pension plans, investment author Evensky says traditional pension plans may be headed for the scrapheap.

Best strategy for pensionholders: Get as much information as possible from your company so you can make informed choices to safeguard your money. Some plans allow lump-sum withdrawals — a worthwhile option if a pension seems shaky.

SCARY POSSIBILITY NO. 4

Q There are concerns that the twin deficits — the national debt and the foreign-trade debt — will cause interest-rate spikes or a decline in the dollar's value. What to do?

A . If you can, own some international stock funds; these are stocks of overseas companies who do business in foreign currencies. But don't pull all of your money out of the U.S. stock market on dollar-value fears, the experts say. It's difficult to predict exactly when such changes will happen, and betting on a dollar crash could be risky and costly.

Some money managers believe the best hedge against a weakening dollar is to buy gold, a commodity that's seen a sharp run-up in value over the past year.

Senior market strategist Emanuel Balarie of California-based Wisdom Financial, for example, recommends his clients have at least 15 percent of their portfolio in some form of gold — stocks in gold-mining companies, gold bullion, coins, gold futures. (A caution: Futures, essentially commitments to buy gold at a future date at an agreed-upon price, are riskier than the average person probably would want to gamble on.)

High interest rates are a legitimate fear, says the financial forum's Dodd. They tend to depress corporate spending, possibly triggering an economic slowdown, and to slow the real-estate market, as mortgage payments rise.

Interest rates around the world often mirror U.S. rates; there could be ripple effects abroad, making foreign stocks less of an effective counter-measure.

Some large investors and institutions will have the means to buffer their portfolio returns against the impact of high interest rates by using complex instruments such as hedge funds, which profit by successfully predicting future stock prices.

Ordinary folks' best bet: Retirees should keep a portion of their money in cash, then hunker down. Evensky's mantra is that retirees should keep all the money they think they'll need for the next five years in cash, to guard against having to sell when the market is down.

SCARY POSSIBILITY NO. 5

Q . What about rising oil prices?

A . It's hard to predict all of the impacts higher oil prices could have — on car sales or airlines, for instance — in part because no one knows how long oil prices will remain high.

Some have tried to profit from the price rise by switching into oil-and-gas sector stock funds, but the experts advise against this, saying people who try to ride investment waves usually end up getting in when they're crashing.

Staying broadly diversified, concludes Scott Budde, managing director of financial-services firm TIAA-CREF in New York, is still a better insurance policy against upheaval in a particular economic sector.

SCARY POSSIBILITY No. 6

Q . Some say Puget Sound's real-estate ride is over — with interest rates up and few economists foreseeing more record-breaking home sales or price increases. Is the long-term investment value of our homes in doubt?

A . Some say the ride's over but others say it continues, just not at the breakneck speeds of the past two years. In any case, if you have a home with reasonable financing, history shows your investment is fairly solid. However, new investments should be approached with more caution. Buy-and-sell "flipping" now is riskier in our area. (See p. 8 for more about real-estate investing.)

SCARY POSSIBILITY NO. 7

Q . Some say we should worry that retiring boomers will all cash out their stock portfolios at once, possibly causing a market downturn.

A . Likely won't be a problem, says Dodd. "At the same time the boomers are retiring, there will be a global surge of people under age 30. That will mean an increase in global savings."

— Suzanne Monson contributed the real-estate information.

Copyright © 2006 The Seattle Times Company

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