Has the worldwide slowdown slowed you down – yet?

You may not have started to feel it yet, but the world’s economy has started to slow down and it’s going to affect many of us in the months and years to come. While unemployment in Israel dropped last month to an all-time low of 5.5% in the second quarter and labor participation rates continued to rise to 57.5%, full-time employment figures dropped one percent and part-time employment rose seven percent. These troubling statistics suggest that more and more companies are realizing that tougher times are on the horizon. Lean periods necessitate hiring fewer full and more part-time workers, which gives employers increased flexibility to reduce future costs if necessary.

But why is this trend occurring? What can we expect over the next number of years and what can we do to prepare for it? Internationally, it has become increasingly clear that we are headed towards a general economic slowdown that will probably send the US, Europe and much of the world into a recession in the upcoming months. American and European debt problems and a returning liquidity banking crisis will bring back unpleasant memories of 2008, when international credit markets stopped functioning and stock markets crashed. Those who refuse to acknowledge and prepare for the current trend, will be unpleasantly surprised when their reality changes. The worldwide market drop and increased volatility in August, and since the beginning of the year in Israel (the Tel Aviv 25 Index fell 7.5% in August, and has fallen 14.6% since the beginning of the year) reflect the market’s expectation that lean times are ahead as we approach an international slowdown that will see slower growth throughout most of the next decade.

Slower international growth will negatively affect Israel and will filter down to the average person in many ways. Unemployment is projected to rise as exports decrease and overall economic activity slows (second quarter estimates have already been reduced and the third quarter will undoubtedly be worse with the consumer protests affecting spending and overall economic activity). When the employment market weakens, getting a raise and bonus will be increasingly difficult so you’ll need to learn to get by on what you’re earning now. Those losing their jobs and seeking new employment will be challenged to maintain their salary levels. Inflation will continue to erode our purchasing power (although it will be lower than we’ve seen over the last number of years). Pension investments and investment portfolios in general will be hard pressed to maintain the modest rates of return over the past decade, let alone the high level of returns that were common in the eighties and nineties.

So what can you do to adjust to the changing economic times? Below are a number of areas that you should consider altering in your financial life.

1. Cut your spending now in order to ensure you have a long-term balanced budget. Living in the minus is a long-term losing strategy. Tightening your belt now will help you weather the upcoming storm. It’s always easier for you to cut proactively than be forced to cut by someone else.
2. Increase your savings rate. When lean times are projected, saving more money now can help you to maintain your current and future standard of living. People are living longer and staying healthier for many more years so you need to ensure you have enough money available to last you through retirement, “ad 120”.
3. Diversify your investments into different asset classes. While slower growth will impact on most financial assets, successful diversification can reduce risk. Having all your money invested in a single asset (aka Madoff) is just too risky for the average person, especially given the plethora of financial and investment scams both locally and internationally. If something seems too good to be true, then it probably is.
4. Change your asset allocation. Alternative investments strategies (that can make money even when the traditional stock market portfolio is losing money) provide opportunities to continue to increase your assets and soften any future fall. There are no shortage of investment ideas out there, but often having a professional evaluate them can increase your odds of finding the right one and avoiding the wrong deal. Passive investing in index funds will be insufficient to provide for growth in your portfolio and you’ll need to find investment managers who you can work with to reach your goals.

While economic protests can be effective and help to change the economic priorities of the country, you also need to be proactive and not wait for someone else to fix your problems. Macro economic changes (that affect the economy as a whole) can help, but micro (household level) changes have even a greater chance of being successful. Take things into your own hands and with Hashem’s help you can make it happen. You won’t regret it!