Here's one lesson we can draw from 2008: Grandma was right after all. Things really do look different after you've gone through tough times.
My grandmothers -- and maybe yours -- lived through the Great Depression. They saw firsthand the economic displacement that most of us know only from history books and old photos. More to the point, the experiences of their immediate families during hard times imparted key lessons and values -- values, about money in particular, that might have seemed old-fashioned to most of us. Until recently.
Did your grandmother say the following things to you?
"Always have some savings for a rainy day"
"But Grandma, the yield on that bank account is next to nothing," we'd tell her. "Put that money in stocks instead." She had the right idea, though. It's true that, recent blowups notwithstanding, stocks are an excellent place for long-term money that you're sure you won't need for at least five to seven years.
But rainy-day money, what we call an emergency fund, is money you might need tomorrow. It belongs somewhere that's safe and liquid -- meaning you can get at it quickly without hassles or big fees or "substantial penalties for early withdrawal." If you don't like the yields on your local bank's savings accounts, try a money market mutual fund. The government is guaranteeing them for the time being, but if you're worried anyway, stick with the big providers. Fidelity, Vanguard, T. Rowe Price, and similar heavyweights can be expected to stand behind their funds if something bad should happen.
If you don't have an emergency fund, or if your "emergency fund" consisted of a plan to tap home equity or credit cards in a pinch, it's time to build a real-money reserve. Three to six months' income is an ideal amount, but even a few hundred dollars is better than nothing. If things get really bad, every little bit will help.
"Debt is a scary thing"
Even if your grandparents were really debt-averse, odds are they had a mortgage, but I'll bet it wasn't the biggest mortgage an easy-credit broker would give them -- not that such brokers existed back then, but you know what I mean. Instead, they probably erred on the side of a smaller loan, a smaller house, and a monthly payment they felt sure they could make even if things got tough. And I'll bet they didn't make a habit of maxing out their credit cards.
They might have seemed overly cautious by modern standards, where the monthly payment has all too often been the key consideration, but here's what they knew: Debt is a tool, and a very useful one. So is a chainsaw. A failure to be careful with either can have exciting consequences, in an "oh, look, the engine just fell off our airplane!" sort of way.
If you're up to your eyeballs with credit card or other debt-driven excitement, now's an excellent time to start deleveraging your wallet, before your bank pushes you into it. Consider: The three biggest credit card issuers in America are JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), and Citigroup (NYSE:C). Think those organizations are under some pressure to cut losses and reduce exposure right now? Other big plastic providers, such as American Express (NYSE:AXP) and Capital One Financial (NYSE:COF), are seeing delinquency rates rise sharply -- a trend that isn't likely to reverse course anytime soon. That's not a bandwagon you want to jump on.
"Be careful when you invest"
Grandma was always very concerned about the risk of her investments. She wanted big, stable companies she knew, with solid dividends -- companies such as Procter & Gamble (NYSE:PG) or Merck (NYSE:MRK). Small caps? Not unless she had expert guidance.
Of course, as we know, the best small-cap stocks are the biggest wealth builders over the long haul. And although building your own portfolio can be a great way to go, Grandma would never have bought into that idea. She might, though, have been tempted by a great small-cap mutual fund -- if the manager's way of thinking dovetailed with hers.
My grandma might have liked Royce Special Equity (RYSEX), for instance, a deep-value small-cap fund with an outstanding track record. The manager, Charlie Dreifus, is her kind of guy -- he keeps a lot of his own money in his fund and margins of safety in the forefront of his mind. Royce is down for the year, but it's well ahead of the S&P 500 -- and it should do very well indeed once the market starts to turn around.
Royce Special Equity was recommended by our Champion Funds newsletter back in 2006, and it was one of 21 funds cited for high praise in the new issue's year-end report. If you'd like to see the other 20, and get to know some more managers Grandma might have liked, help yourself to a 30-day free trial of Champion Funds. There's no obligation to subscribe, just as Grandma would have wanted. Get yours now.
