A bend in the road is not the end of the road . . . unless you fail to make the turn.
~ Author Unknown
Like a bend in the road, change can be painful, or it can offer tremendous opportunities. It all depends on a few variables:
- What kind of shape is our vehicle in heading into the turn?
- How fast are we driving?
- How we perceive the bend: Is it something that has caught us off-guard, or are we prepared to slow down and navigate the turn safely? Do we feel like a victim of the change, or are we confident it’s a challenge we can meet?
- How we react to the change: Will we adapt to it or miss the turn, crash and burn?
Friday’s book review on Consumed: Rethinking Business in the Era of Mindful Spending pointed out some of the emerging changes in consumer habits and postulated that this evolution is not a temporary fad, but a slowly evolving new normal. (You can win a free copy of the book if you submit a comment on the review before Saturday, September 18, 2010.) The book looked at the ways in which these changes will affect the marketing practices of every business.
But what do these changes mean for us, the average consumer? How will they affect your money and your life? We’ll take a stab at that today, and I’m looking forward to your comments.
In their book, Andrew Benett and Ann O’Reilly describe 4 paradigms of the mindful shopper: embracing substance, rightsizing, growing up, and seeking purposeful pleasure. These are changes in the way people shop for and consume all types of products. They are rooted in some of the macroeconomic shifts we often discuss:
- Deleveraging: Too much debt on the balance sheets of governments and consumers means it will have to be unwound through reduced spending, increased revenues, or a combination of the two.
- Downsizing: Right now, we have too much of too many things. In order to bring our economy back into balance, we’ll need to do a lot of rightsizing – for the most part, that means downsizing.
- Destabilization: The structural changes required to rightsize our financial system and our collective balance sheet will mean that the status quo will no longer exist and that “normal” will be a moving target. Take some motion-sickness pills and prepare to adapt.
Your success will likely depend on the financial parallels of the variables mentioned at the beginning of the article:
- How healthy is your balance sheet as we approach these changes?
- How much risk have you assumed in terms of your investments, employment, or lifestyle choices?
- Do you feel like these challenges are so overwhelming that you are reluctant to meet them, or do you view them as a catalyst for positive change?
- Will you embrace the coming socioeconomic evolution as an opportunity to implement real improvements, or will you try to maintain the status quo?
How to Navigate the Turn
There are a few main areas of your life that you may want to audit in order to determine whether or not you’re ready to make the turn as we navigate this new normal together:
For most of us, employment represents most or all of the income that supports our balance sheet. The deleveraging and downsizing that will occur over the coming years will likely mean continued instability in the job market. How can we prepare for and adapt to that possibility? Here are a few suggestions:
- Maintain Your Marketability at All Times: Make sure your skills, resume, and qualifications keep pace with the changing marketplace. Be on the lookout for the emergence of new industries that might interest you.
- Make Yourself Less Expendable: You may not be able to prevent a layoff due to corporate downsizing, but companies will always do their best to retain the cream of the crop. Make sure you rise to the top by performing your duties with consistency, integrity and efficiency.
If you are trying to boost your balance sheet by saving more and paying down debt, you will need to rightsize your spending habits, and perhaps downsize your lifestyle. Here’s how:
- Plan Your Purchases: No more impulse buys, whether large or small. Taking a list with you and buying only what’s on the list, researching larger purchases ahead of time, and waiting for sales can help curb your expenses.
- Budget, Budget, Budget: If you don’t know where your money is going, you can’t truly have control over your finances. A budget can be an extremely empowering financial tool. If you are spending more than you earn, you need to reduce your spending. It doesn’t matter how you do it, just that you do it.
Most of us have not saved adequately for the future. In the post consumerism era, we will not be able to rely on the stable pensions, stock market returns, or even reasonable interest rate yields of the past to fund our retirement goals. It is incumbent on us, in keeping with the “growing up” paradigm, to determine the best way to fund our future. We will likely need to earn more and save more in order to do so, due at least in part to some of the changes in the investment climate mentioned below.
I’ve written often about how the current investing climate will not look very much like the one we witnessed from 1980 – 2000. It’s not that tried and true strategies like dividend, value, or growth investing won’t work at all anymore; it’s just that the way we execute them may need to change a little as the post consumerism era unfolds.
Neither the stock market nor the bond market are likely to offer the returns of past decades, at least for a while. The economy will likely muddle through as we all attempt to rightsize our balance sheets. There is also a higher probability of more crises as we proceed through the deleveraging process and unwind the excesses of the consumerism era.
The structural changes needed to rebalance our financial system will like lead to more volatility. Markets will likely be riskier for a few more years – maybe even the next decade. I hesitate to offer any bullet points on this as there is no one-size-fits-all approach. Remember that your choices must account for your own retirement time frame and risk tolerance. With those caveats in mind, here are a few strategies you might consider:
- Decrease Your Position Size: In keeping with the downsizing theme, it might be prudent to reduce the size of your allocation to riskier assets – that means any asset without a guaranteed return, including stocks, ETFs, equity mutual funds, and bond funds. Neither stocks nor bonds are all that attractive at the moment, but that doesn’t mean you need to completely avoid them, especially if you have a longer time frame. Reducing your exposure by raising your cash allocation is a good option. Some Canadian online banks offer higher interest rates if you park your cash in a TFSA savings account.
- More Activity: Although many people have neither the time nor the knowledge to actively trade their portfolio, the new normal will require a little more agility due to the ongoing volatility. For some, this may mean rebalancing more frequently. For others, it will meaning maintaining a lower core equity position and trading some of their portfolio more actively – buying the rips and selling the dips as the cliché goes.
Becoming a more mindful consumer of products and services ranging from household necessities to investments means that we’ll need to educate ourselves. We need to learn more about personal financial management, investing, and saving. Many consumers are already taking on this responsibility, but they tend to trust fellow consumers more than experts or journalists.
Adapt and Enjoy the Ride
Those of us who write about the seismic changes in our economy are often viewed as pessimistic, paranoid, or just plain wrong. But many of the suggestions offered here are good advice whether these changes unfold in a smooth and orderly fashion, in a bumpy, chaotic pattern, or not at all. In fact, many of these changes are sorely overdue, and will eventually lead to an economy and a society with a much more sustainable foundation. In that sense, I couldn’t be more optimistic.
Are you ready to make the turn? What kinds of changes have you already begun to implement?