Stress Test for Stock Investors

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.

The world of stockbrokers is dynamic if nothing else. Just a few years ago, you could divide the pie into two basic pieces: Full service brokers and discount brokers.

But, as you would expect, the heart of capitalism has evolved and adapted to changing market demands. The lines between full service brokers and discount brokers have blurred to the benefit of investors.

While it is still not always easy to fit each broker into a neat pigeonhole, you can make a general distinction by the services they offer.

Full Service Brokers

At the top of the service provider list are full service brokers. Full service brokers today have to be much more than order takers (why use them otherwise).

Companies in this category profess to offer a complete range of financial advisory services that extend beyond picking stocks to retirement planning and meeting other financial goals.

You pay a price for this service, but if you get a good broker they can help you chart a course for your financial future.

Discount Brokers

Today's discount broker is evolving into more than an order taker. There is a big slice of the market that wants something more than an order taker, but less than the handholding of a full service broker.

Many of these brokers offer investment advice, but short of the comprehensive planning you might get with a full service broker. They have excellent research resources available on their Web sites and robust online capabilities.

You'll pay more than the deep discount brokers, but less than full service brokers. However, many investors find this middle ground very comfortable.

Deep Discount Brokers

These brokers resemble the order taker image of old, but even they have evolved with stronger online platforms and better customer service.

If price is your primary concern, this is the way to go. You may want to look at brokers in both discount categories to see what level of support works best for you.

Conclusion

Picking a broker shouldn't be about price alone. Be honest with yourself about how much help you can use and go with the broker who can fill in any gaps in your knowledge and experience. Together, you'll make a better investing team.