The Sky Is Falling Again! So What?

I'm going to take a quick break from my series on saving for college to address an issue in the media: the economy. Today's Wall Street Journal ran an article called "Greenspan Says Turmoil Fits Pattern" where Alan Greenspan, the former Federal Reserve Chairman and still-reigning econoczar draws parallels between the current malaise of the "credit crunch" and turmoil in the housing market. (For those of you who don't know what a credit crunch is, it means a time when people and corporations have a hard time getting loans.)

Greenspan is quoted as saying, "The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly [the bank panic of] 1907..."

The first thing I thought was... uh oh.

But then I asked myself, "So what?" What does this mean to the personal finances of the physician families I serve? Well, let's consider the facts behind the fear factor:

  • Yes, the stock market did crash in 1987. but large company stocks finished with a GAIN of more than 5% that year
  • And the market tanked again in 1998 when the Asian Currency crisis hit, but it still had a double digit gain that year (though it was a very wild ride).
  • And finally, how can you even begin to compare the economy of 2007 to the economy more than 100 years ago? Back then, women didn't even have the right to vote, much less run for the presidency. People think differently today.

Now let's consider the financial realities of the average physician family...

  • You're working in a field that's largely untouched by the wax and wane of the economy.
  • Your income puts you in the top 5% of earners nationally.
  • You not only make more than just about everybody else, you make more than you need to support your modest standard of living so...
  • You can save a substantial portion of your income for the future.

This puts your family in a unique and special position.

The more money you have, the more conservative you can be. Meaning? If you can save well, you don't have to knock the cover off the ball with your investments. All you have to do is store up enough to reach your goals, and make sure you stay ahead of inflation.

You see, risk is a bad thing. You shouldn't take on more risk than you have to while you're trying to reach your goals, and the more money you have saved, the less risk you really need to bear.

This lets a lot of gas out of the heated discussion among television pundits and newsflash know-it-alls. Sure, the market could crash again, but you don't have to invest all your money in "the market."

If today's news makes you nervous, here's an action plan that will help you overcome your fear:

  1. Figure out how much money you really need to pile up in order to reach your most important life goals (paying for college or enjoying your retirement). We'll call this "Point B."
  2. Total up how much money you've saved so far in 401k's, IRA's, 529's, mutual fund and brokerage accounts. We'll call this "Point A."
  3. Sit down with a Certified Financial Planner®, tell them you want to invest in a moderate to moderately-conservative fusion and ask them to tell you how much you should be saving each month for your goals.
  4. Start saving more, and stop bearing so much risk.

The Bottom Line: Great savers beat great investors every day, simply by using the brute force of their ability to earn an excellent income. Save more, risk less.