When circumstances beyond your control result in a sudden reversal of fortune, what should you do?
In my last blog I wrote about the initial steps to take when you're the recipient of a financial windfall. So let's see what our two experts have to say when the situation isn't so fortuitous, and your money takes a sudden turn in the direction no one wants to see -- a precipitous fall.
Those invested in the stock market witnessed a reversal of fortune -- at least on paper -- last year. Homeowners who bought during the boom years have also likely seen their real-estate values decline. But there are other situations that could cause a sudden decline as well, including medical problems, loss of a spouse or divorce. "The first thing is to learn humility if you didn't already have it," says Carlo Panaccione, founder and president of the Navigation Group, in Redwood Shores, Calif. When the stock market suffered its losses last year, he says he noted two extremes in behavior -- neither one of which is healthy. "One extreme is that they were too scared to get in, but we've seen throughout history that the market is cyclical. The second extreme reaction was those who said they would keep spending, because 'it would come back.'"
The correct behavior, he counsels, is to figure out what your financial needs are at the new, lower financial level, and decide how to adjust. "If you're in an income mode, you should always have three buckets planned," he says. The first bucket, covering a period of one to five years, should contain the liquid assets that will sustain you financially up to five years. The second bucket is for a period of five to eight years, and third bucket, with your long-term assets, is meant for eight or more years down the road. When the market is up you refill the shorter-term buckets as needed. That way, you never have to draw from your long-term and illiquid assets when the market is down.
Certified Financial Planner Susan Bradley, author and founder of The Sudden Money Institute, in Palm Beach Gardens, Fla., says the initial human reaction to a sudden financial reversal is panic that leads to anxiety and stress. "This reaction is normal but potentially dangerous -- you may find yourself literally in a type of trauma called 'money shock.'" The stress leads to a reduction in the skills you need most at this time: rational thinking and problem solving, and people will tend to make fear-based decisions such as selling the house, canceling insurance policies or pulling kids out of school. While these actions may be necessary, it's best to take a step back and deal with the stress first.
Bradley recommends making a list of your fears and then prioritizing them according to how much control you have, and organizing them in a plan according to what you should do first, and which actions can wait until later.
Many of you responded to what you would do if you had a fortune. Now tell us what you would do (or did) during a reversal of fortune.