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Dennis Smith

Many of my friends who think of me as a best-selling writer are surprised to learn that I have successfully completed the federal exams to be a licensed financial advisor, but I don’t think it’s a great leap from being a line firefighter, or for that matter from being a registered nurse, a police officer or an EMT, to being a financial expert. All of these professions require a sound and prudent view of the world, a recognition of personal obligations and the desire to help.

I told the editors of Firehouse® that I would like to convey to our readers some of the many financial lessons I have learned since I began many years ago to publish books and magazines, and had a little investment money left over after all the bills were paid. And, so, this is the first of many columns that I hope will provide you with enough guidance in money matters to make you feel more confident about how you are handling things for yourselves and your families.

The first and fundamental lesson in your financial concerns is to recognize that the preservation and growth of your money is no one’s responsibility but your own. I hope I can make it easier for you, particularly in these uneasy times.

There is a saying that those who do not know history are doomed to repeat it. But, sometimes knowing history doesn’t count a whit. Or even a chad. Who could guess that our presidential election could totter on a tightrope for so long, helping to send Nasdaq in a rapid downward spiral, losing trillions, a notable 23% in three weeks, and suggesting to all that our economy might be falling into that dreaded pit called a "recession."

"What exactly is a recession?" I heard a firefighter say. Some define "recession" as two quarters, or six months, in a row of falling Gross Domestic Product (everything we make and sell). Others say recession isn’t really a drop in the GDP, it’s just that the GDP is growing at a slower rate. But by any definition, recession means a bad economy.

What is it that makes so many experts think a recession is about to befall us? Well, consumer confidence is down and people aren’t feeling very optimistic. They aren’t buying as much, so factory orders are down. Stock prices are down. Oil prices are up, which eats up any extra cash to spend on stuff like new cars and home improvements.

Here, history does help to explain the economic picture. Many of the recessions in the last few decades have set in right after a presidential election. Another historical indicator is the business cycle. We’ve never had a period of economic boom that’s lasted as long as the one that occurred during the 1990s and many experts insist that this just can’t keep going forever.

But there are others just as smart and as highly paid who believe we’re not headed for a recession at all. Alan Greenspan and the Federal Reserve, they think, have perfected the art of fine-tuning the economy with their interest rate tuning fork, which allows them to keep the economy humming by lowering interest rates when things start to look sour. This makes credit easier and cheaper to get so that people can buy more things, which creates more factory orders, which creates more jobs, etc. And the Fed can raise interest rates to ward off inflation and has done so quite successfully in recent years. Since Greenspan just started a new term as head of the Fed that won’t be up until 2004, many believe he can and will keep the economy perking. On the other side of the picture, people are saying that Greenspan raised rates too much, 11/2 percentage points since last spring, and that may have caused the economy to slow too much. Again, economists hardly agree.

If we go into a recession, what does that mean to you and me? For a lot of people, recession may mean their jobs are on the line as employers look to cut costs. During a recession, investors won’t make much money in their portfolios, so corporate earnings and stock prices will fall. But there can be advantages to a recession, too. If your paycheck isn’t in jeopardy, a recession can be a great time to buy property, stocks, or big-ticket consumer items like cars, equipment and houses at sale prices. During a recession, the Fed is more likely to cut interest rates, which can help you get credit for these big-ticket deals.

What can you do to weather the storm of a recession (if indeed it comes)? Well, that depends on how bad you think things are going to get, and your guess is probably as good as that of anyone in a Washington think tank. If you anticipate another 1929, you can run for the hills, but I don’t think anyone is worried about a collapse of our economy. We should, though, be concerned about job security, our ability to pay our bills, the educational plans for our children and our family investment policy. Firms will lay people off to offset declines in sales, and that is always difficult for people. Even firefighters and police officers in New York City were laid off in the recession of 1974, for as sales decline in a city the tax base declines as well.

And, so, it is time to evaluate your own economic profile. Should you sell all your stocks and invest in something ultra-conservative, say, Treasury bonds? If you think the economy will tank, you may feel more comfortable doing so. But, most advisors, including me, would urge you to sit tight. Anyone who owns stocks should be prepared for the market to go up and down. And since no one (I mean no one) can predict with any accuracy when a sliding market will turn around, you risk missing out on big stock market gains if you stay away from stocks.

In short, most of the same financial advice that applies during good times also applies during a recession. Don’t spend more than you earn. Invest long-term money for the long term and be prepared to wait out market ups and downs. Invest money you’ll need in the next few years conservatively, in bonds or money-market mutual funds. Make yourself indispensable to your employer, so that your job is secure. Keep an emergency fund available. Don’t panic. Recession isn’t pretty, and how long it lasts isn’t predictable. But if it comes, it won’t last forever.

When investing your money, the best history is the one that suggests the prudent person is the one who makes out in the long run. Just remember the word "prudence," and you’ll come through it just fine.

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