How would you do on a financial stress test for stock investors?
As the economy struggles to get back on its feet, major financial institutions are being rated by the likelihood of failure.
The so-called stress tests measure how viable the institutions are and how much of a financial hit they could take without collapsing.
Given this sector’s tragic role in melting the economy beginning in 2008, it is no wonder that regulators are very concerned about identifying any future bailout possibilities.
Unfortunately, there is no one to bailout stock investors if the get in over their heads.
How would you (or have you) survive a financial disaster?
Here are some possible stress points for stock investors. They all won’t apply to everyone, but consider them a start on performing a personal stress test.
We’ll skip the obvious ones, such as losing your income. If that happens, you aren’t an investor any longer.
- How much do you have in liquid assets (cash, money market funds, bank CDs and so on)? If the answer is less than six months of what it cost to maintain you household, you are at risk.
- How much short-term debt (credit cards, store cards, personal loans, auto loans, margin loans and so on) do you carry? If you are having trouble making it through each month, you are at risk. Do whatever it takes (short of more debt) to get that debt off your personal balance sheet.
- Are you upside down or close in your mortgage. In other words, do you owe more than your house is worth? Is so, what can you do to fix this ratio? If you qualify, refinancing may make sense if your lender will go along with the idea. If you are too far down, talk to your lender about any assistance programs that may be available.
- How liquid are your assets? Stocks, bank accounts, money market funds are liquid. Real estate is not. If a large percentage of your assets are illiquid, see what you can do to convert some of the illiquid assets to cash. Better to take a small loss now and have cash in hand than need cash and be locked into an illiquid asset.
- Can you generate extra income? Is there a way you or your spouse can earn extra income – a second job, longer hours and so on. Cash is king in a trouble economy. You can’t have too much.
- Are you still funding your retirement plan? In most cases, this should be one of the last expenses you cut especially if you have a 401(k) and your employer is still matching part of your contribution. This is free money and you shouldn’t pass it up if you can avoid doing so. Your retirement will come whether the economy is good or bad.
This stress test was not meant to be all-inclusive, however it does hit on a major theme of a troubled economy.
Individuals and companies that have relatively low debt and high cash reserves are in the best position to ride out the down times.
Take a hard look at your finances and realistically assess your capacity to handle severe financial stress. If you come up as vulnerable, take the appropriate steps while you still have the option to strengthen your position.
