Going Long On The Big Three

Everyone is waiting for things to get back to normal. But listen up: there is no "normal." We see one set of conditions and learn to run our lives accordingly. Then conditions change, and change again--always to a different game. The new rules aren't posted in advance.

Until the spring of 2000, it was uncool to talk about preparing for a change. Investors cried "stocks forever"--in fact, "tech stocks forever." Owning bonds was, well, a little odd. And what happened over the past 12 months? Mutual funds invested in U.S. Treasuries returned an average of 13.2 percent. Tax-free municipals returned 9.1 percent. Investors who owned both bonds and stocks weren't hit nearly as badly as those who plunged into stocks alone. If you plunged into tech stocks and held through the drop, it could be years before you catch up with boring bond returns.

It also has been pretty uncool to suggest that anyone needed the government for anything. But when safety and health become issues, government gets popular. We want the Feds to write tighter airport-safety regulations because we're afraid that private companies cut corners. We want help for families at risk of losing health insurance after the death of their breadwinner in the terror attacks.

Business turns to the government, too. Suddenly, welfare doesn't seem so bad (corporate welfare, that is).

Stock prices leaped when the Federal Reserve cut interest rates half a point last week. They could tumble back, of course. Still, this seems like a good time to put some money, gradually, into stocks. The potent cocktail of rate cuts, probable tax cuts and higher government spending ought to move businesses out of recession by mid-2002. We're already seeing foot traffic return to regional malls, gains in airline-ticket sales through Priceline.com and car buyers rising to the new zero-rate financing. Not a bad start.

But what if the optimists are wrong? A year ago it seemed normal to take outsized risks. In today's "new normal," families are looking first at whether they're financially secure.

Safety starts with the Big Three: cash, life insurance and bonds.

Remember that old idea--from the early Pliocene Age--about keeping money for three to six months' worth of expenses in the bank? As unemployment cascades down from Sept. 11, cash becomes king. Don't worry about the low interest rate (about 2.6 percent at banks and 2.7 percent at money-market mutual funds). This is Real Money. It guarantees that you can get on with your life, no matter what.

Life insurance promises your family a future even if you're gone. As a rule of thumb, parents of two children should carry policies worth seven times the family's income. Two-income couples need to divide the coverage proportionately. If one of you earns 60 percent of the income, he or she should carry 60 percent of the insurance.

Term life insurance has never been so cheap for healthy people who don't smoke, says Robert Bland of Quotesmith.com, which tracks insurance costs. Premiums have dropped 6 to 8 percent in the past six months alone. Depending on his state, a 40-year-old man can buy a $250,000 20-year policy for as little as $235 a year.

As for all you swingers who still think bonds are too conservative--ask yourself how you'd fare if business didn't recover. What if we're like Japan and just don't know it yet? Any decent backup plan needs to cover even this outside risk. Conservative bond mutual funds--Treasuries and tax- exempts--preserve your principal in hard times while paying you an income, too.

If Americans have to turn to what they thought was their government safety net, they'll get a shock. Back in the boom times, we cut giant holes in the net so that we could pay less tax. Now some of us are tumbling through. Here's the bad news:

Unemployment benefits replace 32.9 percent of workers' average earnings, down from 37.7 percent in 1982. Most states don't cover part-timers, whose numbers have risen since the downturn of 1990-91. In nearly half the states, the programs aren't financially strong enough to last through a serious recession, according to the National Employment Law Project in New York. The three states whose funds are closest to drying up: North Dakota, Texas and hard-hit New York. To pay benefits, underfunded states will have to raise businesses' unemployment tax, borrow from the Feds or tighten workers' eligibility for aid.

Last week President George W. Bush proposed adding an extra 13 weeks of unemployment pay, at federal expense, in states with serious job losses after Sept. 11. The states directly affected by the disaster will get it now. Elsewhere, the unemployed will have to wait to see how serious their state's unemployment problems get (to calculate your unemployment benefits, go to epinet.org/datazone/uicalc/).

Then there's the welfare question. Under the 1996 reform, people can be kicked off the rolls forever if they've collected for up to five years. But what will governments do if mothers who moved from welfare to work now lose their jobs? Let them beg?

The federal COBRA law gives you the right to keep your group health insurance at your expense when you leave a job. But a family plan easily costs $7,000 a year--impossible on the jobless pay of $230 a week. Firms with fewer than 20 workers offer no COBRA at all.

The president proposed grants to states to help workers and families dislocated by the tragedy. States could choose to help pay COBRA premiums for up to 10 months. But what about those without COBRA? Sen. Edward Kennedy proposed broader benefits to help everyone. Bush's plan is as narrow as the politics allow.

Pots of money will be spent on physical security, as they must be. But after the war budget, after the cost of last year's 10-year tax cut (with new business tax cuts to come) and after the recession costs, there ain't gonna be no money for anything else. No Medicare drug benefit. No budget surplus to ease the Social Security strain. This is the new normal, as long as Americans won't be taxed. All the more reason to check your personal perimeter, and save.