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Investors have truly been challenged in the last 18 months by the stock market and the economy. We have entered a new era of American finance–and really a new era of world finance. We have ended an era of greed, and now find ourselves in an era of caution–as in we really need to proceed with caution.

In the last 18 months, the United States has seen a simultaneous collapse of the stock, housing, and credit markets, and it's created an entire new world we live in. With the federal debt, the unfunded future liabilities of Social Security and Medicare, and unfunded pension plans, we have a total federal debt outlook in the neighborhood of $56 trillion. With the spending and the printing of money, we've got huge inflationary concerns.

How do we react to all this? It brings us back to the four new realities of financial security. I say new, but really these are old traditional rules and fundamentals that we sometimes forget when we're in good times, and unfortunately have to be reminded of in bad times. Without further adieu, here are the four new rules:

1. The new paradigm of world finance. In the last eight or nine years, traditional investing models and traditional thinking has simply not worked. Sometimes realities change too much to stick to the old way of thinking. The old "buy and hold" philosophy and a traditional portfolio of stocks and bonds are examples. That approach has not worked in the last eight or nine years. If you are within 10 years or less until retirement, can you afford to take the risk that it will work in the coming eight or nine years?

When we have such a major shakeup in the foundation of our economy, we have to be able to react to these new fundamental rules and react accordingly.

2. Identify your true goals. You have to ask yourself, "What is my real goal here? Is it to make as much money as I possibly can, or is it to develop a plan that can produce a lifetime of income security during retirement for the rest of my life for me and my family?"

Sometimes when we pursue one goal, we risk losing the other. And which of those two goals is more important? Ultimately, it's not about whether we beat the market or not. You could have lost a lot of money and still beaten the market in the last 18 months. It's all about this: Do you make your goal or do you miss your goal? It's all about identifying that goal and then developing a plan that gives you the highest probability of success in reaching that goal.

3. A new understanding of risk. Warren Buffet has always said that if you invest in the stock market, you should be able to wait out a 50% loss. Sometimes we dismiss that because when we're in good times, we tend to forget that fundamental truth. We have to understand that, yes, stocks will go up, but how long will it take? We have substantial periods in our history where stocks have lost value.

From 1966 to 1982, the stock market averaged on an annual basis a net negative return of over 4% per year. In the last 10 years, the stock market has a net negative return. And those two markets don't even factor in the effect of inflation, which makes those losses even more compounded. It is very important to realize that stocks don't always go up in 10-year periods. You need to decide how much risk you are really prepared to take. Volatile upside potential means volatile downside potential, and you have to be aware of the inherent risk.

4. Redefine diversification and balance. And really "balance" is the right word. A lot of times, we think diversification means just having a big basket of stocks across different industries. Diversification really means having a balance of assets that will temper safety and growth opportunity in good markets and bad. True diversification allows us to expect more reasonable growth with more steady returns.

The traditional models for balancing your investments have been a mix of stocks and bonds, but as I mentioned previously, that has not worked in recent years. It is currently a tough situation for people who only use a mix of stock and bonds. We live in a world of very low interest rates now, and we have huge inflationary concerns. If and when interest rates rise, bond values will decline. If the stock market continues to struggle on top of rising interest rates, the traditional stock-and-bond investor is in big trouble.

We have to consider and implement a more diverse set of assets that give us more balance, so that when we have one asset class that does poorly, such as stocks have done in the past 18 months, we have other assets that are going to hold up the value of the portfolio. If we have the right kind of balance, over the long term, we can expect reasonable growth. Ultimately, that's what's going to get us to our goal. The best way to make a lot of money is to not lose a lot of money, and if we have balance, we minimize the chances for having substantial losses in bad markets.

Finally, as we get closer to retirement, we've got to secure our income for the next 10 years. We've got to start rebalancing those portfolios so we've got the safe money we can depend on when we need it for income in the early years of retirement.


Jim Brogan is the president and founder of Brogan Financial Inc., a local firm that specializes in comprehensive wealth and distribution planning. His radio program, "Well Preserved with Jim Brogan," can be heard on Sunday mornings from 7 – 8 on FM 100.3 WNOX. During the week, he can be reached at 865-862-6800.

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