newjerseynewsroom.com

BY WARREN BOROSON

NEWJERSEYNEWSROOM.COM

BOROSON ON MONEY

Hard times may be knocking at the door.

My favorite New Jersey economist, A. Gary Shilling, believes that one or more of five problems could drive the economy into a full-fledged recession. The Big Five:

Thanks to excess inventories, there might be another 20 percent decline in house prices – and underwater mortgages might jump from 23 percent to 40 percent.

Further Middle East turmoil could boost energy prices to levels that could trigger a recession.

The Eurozone crisis (Greece, anyone?) may cripple U.S. and international banks.

Japan’s earthquake and tsunami are speeding up the crisis in government debt financing – around the entire world.

China’s economy may have a hard landing as she reins in her overheated economy -- preceded by a bursting of the global commodity bubble.

True, the stock market climbs a wall of worry. But right now that wall seems awfully high.

So, am I going to tell you to screw your courage to the sticking point? To hold on through thin as well as thick? To invest for the long run? To remember that the stock market always bounces back?

No.

My message is: Make sure you have enough cash and cash equivalents to

tide you over any bad times. An emergency fund.

An emergency fund is something you should always have. And when times seem preternaturally perilous, make doubly sure you have spare cash. Kept snug in money market funds or, even better, in short-term bond funds.

All sorts of nasty things could happen that require you to fork over cash. You might lose your job – or your business might fall off. The IRS may decide you owe more than you have paid. A medical problem -- yours or a family member’s – may not be fully covered by insurance. You might be sued – maybe someone tripped on your sidewalk. Whatever.

And it’s better to sell a little now, to raise cash, rather than in the months to come – when the stock market may have gone to hell in a handbasket.

How much cash? It depends on you and your situation. Might you lose your job? How hard might it be to get another one? Keeping 5 percent or more of your assets in cash equivalents seems sensible.

What should you sell? Losers in taxable accounts – something you should have been considering all along. Small winners in taxable accounts. Small holdings in taxable accounts – anything that won’t hit you with huge capital gains taxes. Finally, lighten up on winners in taxable accounts -- especially if Value Line's rating is 4 or 5 (meaning that their short-term prospects are dim).

I know, it’s painful to sell winners. But it would be more painful to sell them when their prices are way down and they’re bargains.

But you can always buy such stocks back – when the economy recovers, which it will.