How does the current financial crisis impact me and my family? What steps should we take to minimize the damage?

While I can’t provide advice regarding particular investments, I can point you to a number of principles and how they can be applied in today’s environment.

First is the importance of having adequate cash reserves. My grandfather and his brothers operated businesses during the Great Depression. Over the years, they developed a toast that went like this: “Here’s to good luck, good health, happiness, prosperity, tranquility — and liquidity.” Funny? Sure. But wise, too.

Having adequate liquidity at a time such as this is important. That means getting your initial emergency fund and six-month reserves in place. How do you find such money? By spending less than you earn. Get aggressive about doing this. Where should you put your emergency and rainy-day funds? I like a bank money-market fund for the emergency fund and the first three months of your rainy-day fund. A three-month CD (certificate of deposit) is ideal for the second half of your rainy-day fund.

What about the safety of cash accounts? The Federal Deposit Insurance Corp. has raised its insurance limit for banks and thrift institutions to $250,000 through Dec. 31, 2009 — and it’s considering going even further. Check with your institution for additional details, especially about how amounts beyond $250,000 can be insured. Meantime, the Treasury Department has established a temporary guaranty program covering money market mutual funds (offered through investment houses) for participating funds. Contact your broker to determine whether your fund is participating.

What about your longer-term investments?

While each investor has to determine his own investment “philosophy,” the fact is that if you are invested in the current market, you’ve probably participated in a substantial decline. Also, there is now strong consensus that the economic slowdown will be longer and deeper than thought just a few weeks ago. Stocks need to find an equilibrium based on anticipated future economic activity — an impossible thing to forecast with any degree of certainty. While no one knows for sure when the market will turn upward, we know that, based on history, it will eventually do so.

If the current volatility is causing you so much anxiety that you can’t sleep at night, maybe you need to lower the inherent risks of your investments and move toward a more conservative investment portfolio, including a higher percentage of cash and fixed-income investments. But shifting your allocation today limits your ability to recover your losses when equities finally reach their floor and make their upward move. History shows that many people bail out of equities just at the wrong time, absorbing the loss and missing the recovery.

If you stay invested in equities, review your current asset allocation from two perspectives.

First, are your investments reasonably diversified, or do you have all of your eggs in one basket? While diversification by its nature doesn’t provide the opportunity for maximum highs, it limits your downside risk. It’s a scriptural principle that makes sense. Just ask former employees of Lehman Brothers.

Second, make sure to take into account your investing-time horizon. How many years do you have to invest before you’ll need to draw on your invested funds for retirement? The closer you are to retirement, the more conservative you’ll want your investment portfolio to be. There are many opinions about how best to accomplish this, but certainly by the time you are within 10 years of retirement, you need to be factoring financial conservatism into your allocation decisions.

Finally, remember that the first and most important step of all is to be a steward of Providence. Keeping grounded in the faith will provide a proper perspective during these challenging times. God love you!

Phil Lenahan is online at