Friday, October 3, 2008

Protecting Yourself in a Time of Bailouts

After a week of failure, angst, bad press coverage, arm twisting, and pork barrel rolling, Congress finally passed the Bush Administration's $700 billion bank bailout bill. The President signed it into law in less than a New York minute. The stock market, which had swooned when the House rejected the bailout early in the week, got giddy while the voting was under way but then pouted when all was said and done, closing down 1.5%. It seems that the market doesn't think the bailout bill went far enough. Let's face it: $700 billion just isn't what it used to be.

If you've been trying to make heads or tails of the stock market in recent weeks, chances are you haven't had much luck. The Dow Jones Industrial Average has recently moved three digits a day almost every day. Antacid sales are about the only thing going up.

The problem is that your investments aren't just subject to market forces. They're now subject to political forces. Market forces are tough enough to predict. Political forces are, on good days, arbitrary, capricious, warped, perverted, unfair, rife with favoritism and cynical payoffs, and entirely unpredictable. In the last year, the Federal Reserve and Treasury Department have gone a long way toward socializing the financial services sector, and the downturn in the market perhaps reflects the long term prospects for such socialism. At the end of the trading day today, there were calls for more government bailouts. Not that the government call afford more, but there will probably be plenty of bailout talk from both parties that will further bedevil your personal finances.

Today's market action demonstrates that there are limits to what government bailouts can do for you. If there ever were a time to take responsibility for your finances, now is it. Ask what can you do for yourself. Here are some suggestions.

Cash. Cash is your new best friend. Save more, not only to cover personal expenses in case of a job loss, but also to let you dive into the stock market if prices reach a level you consider attractive. Make sure your cash is in federally insured bank accounts ($100,000 per account and $250,000 for an IRA; these levels may rise as a result of today's bailout bill), or in a money market fund that invests only in U.S. Treasury securities.

Creditworthiness. Be a good borrower and repay your debts on time. Build your credit rating. Good borrowers get advantageous rates these days. Bad borrowers are foreclosed on. Get your free annual credit report (at and read it carefully to make sure your credit history is accurate. See that mistakes are corrected.

Health Insurance. Health insurance is very important, especially when times are tough. Economic stress can increase health risks, and a major health problem can blow up your weakened finances in a big way. If you lose your job, continue your health benefits through your COBRA rights. Whatever you do, don't forego health insurance coverage.

Diversify your investments. With the unpredictability of political forces now bruising your investment portfolio, diversification of assets is probably a sounder strategy than ever. There's almost no way to know what direction the pork barrel will roll or when. If you don't already have a piece of the action, you will miss the handout. And, at least in the near term, government handouts may be more lucrative than market forces.

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