Yesterday, USA Today published a piece describing how you should invest in a bad economy. Though the market is in shambles, the authors write, it’s no time to panic:
Enough. The stock market — and your savings — have gone down steadily, day after day, for more than a year. You’ve lost thousands this month alone. It’s time to do something. But…what? Should you shift more money into stocks? Put it all into a savings account? Pay off your mortgage? Hop a freight and become a hobo?
The authors talked to top financial advisers from around the nation. Here’s a summary of the experts’ advice. (For details, please read the entire article.)
- If you’re in your 20s, take comfort in the fact that time is on your side. You probably haven’t lost much, and you have decades to make up the difference. Now’s a good time to focus on paying off your high-interest debt.
- If you’re in your 30s, prioritize retirement savings. “Don’t let fear squander your opportunity,” says one expert. Protect yourself from unemployment by maintaining an adequate emergency fund. Be cautious about moving money out of the stock market, but be open to diversifying with new contributions.
- If you’re in your 40s, prioritize saving “even if it means cutting back on spending.” Don’t abandon the stock market. One financial planner tells USA Today that “nervous investors who stash all their savings in certificates of deposit and money market funds ‘are committing financial suicide’.” Still, stay diversified, and don’t take unnecessary risks.
- If you’re in your 50s, don’t do anything rash. Keep your investments balanced. Continue to save. In fact, the article suggests that you should look for “any way you have to boost your savings, no matter how small.”
- If you’re 60 or older, your position is tougher. You don’t have as much time to recover from the market downturn, but you’re not without options. Put off Social Security as long as possible. (This is a strategy advocated by Scott Burns when I interviewed him last summer.) Take a part-time job. Adjust your expectations.
It seems to me that the advice to every age group (except the last one) is essentially the same: Don’t panic. Diversify. Cut spending. Boost savings. Or, in other words, do the things that we’ve been talking about here at Get Rich Slowly for the past 2-1/2 years!
In a related note, Daniel Gross writes in the latest issue of Newsweek, “Don’t get depressed — it’s not 1929!” Also see this past post at GRS: Why it pays to ignore financial news.
This article is about Investing, News, Planning, Retirement
What about the 20-somethings with no debt and no major expenses? I was lucky enough to get a full scholarship to school and land a job near home. I decided a long time ago that I was going to focus on saving 10k before I thought about investing, but I’m quickly approaching that mark.
What should a young person with no investing experience do with their extra savings so that they don’t sit and rot in a junky bank account?
I’m looking for something safe and relatively liquid. The returns aren’t tremendously important to me, as long as I’m beating out inflation.
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Wish the advice was a bit more proactive. For instance, I’m in my 20s with almost no debt. Besides actively saving, how can I invest to set myself up to be in a good place when the economy turns around? I’m sure you guys might’ve covered this, maybe I just missed it.
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I am a financial journalist and as such, I always advocated a Don’t Panic approach, but unfortunately my less money-savvy editors, who were panicking, made me write front page gloom and doom stories, which just made other people panic. I think that’s why people worry, because the news is covered in bad news end of the world headlines. No boss wants to publish an “it’s going to be OK” story because it doesn’t sell papers.
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let’s talk straight: i sold nearly all stock & stock funds this spring, not because i’ve foreseen the crisis but because i came to the conclusion that the stock market that we see this days is unethical and wrong in my personal opinion (would take some time to explain in detail). as a side effect i’m really happy compared to those who “didn’t panic” and who have lost 50-90% of their savings during the last months. the whole “don’t panic” thing often leads people to not limit their losses but loose everything. just my 0.0$.
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I am thinking to invest right now in the stock market J.D. and I have a question.
Can you name some companies to invest in? I know the market will go up in few years, and i believe that now is the right time to invest.
Michael
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@Denise:
You point out one of the top reasons people shouldn’t look to the media for financial advice. Newspapers and magazines write to sell not to advise. The same goes with TV shows – they’re going for ratings/viewers.
Don’t get your financial advice from the media. Look to more reasonable and level headed sources like Get Rich Slowly or a competent fee-only financial adviser.
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Funny how this advice on what to do during a bad market is exactly the same as what you should do during a good market. Hmmm, perhaps bad markets are nothing to get worked up about if you have been making responsible financial choices to begin with.
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Several weeks ago, I recevied an interesting message from a GRS reader. Unfortunately, I cannot find it again, so I can’t quote it. The gist of it was this:
The reader worked in financial services of some kind. He worked with individual investors all day. He wrote that the current market panic had revealed an interesting division. He said that investors with lower balances were pulling their money out of the stock market and putting it in “safe” vehicles like cash and bonds. But those with more invested in the market were either sitting tight or buying more. “What’s uncanny,” this fellow wrote, “is that there’s some sort of dividing line at about $100,000 in assets.” He asked, rhetorically, if maybe this difference in behavior might not partly explain why the wealthy were wealthy.
I wish I could find that e-mail.
@Michael (#5)
I cannot name some companies to invest in. That’s not the sort of investing I do. I’m a proponent of index fund investing, and as such I would rather own the entire market than just a few companies.
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I’m also under the category of “In my 20s, have (next to) no debt”
I also have no student loans, out right own 3 cars with my wife (a ’97, ’05, ’08 all paid off – one is a hobby), and have never NOT paid off a CC bill immediately. The only ‘debt’ I have is my mortgage, which I’m paying extra towards.
So yes, what about us?
My mutual funds are shot right now. But, I’m still putting 10% into my 401k and maxing my IRA. I guess that just leaves investing/saving even MORE?
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For those of you who are young and without debt (whom I envy, by the way), I personally believe now is a great time to be buying more in the stock market. Remember, however, that I am not a finance professional. I’m just a guy who has read a bunch of books. But based on my reading, I believe now is a good time to be investing.
Yes, it’s very possible (perhaps even probably) that the stock market will continue to decline. My personal belief, though, is that it will be higher 5-10 years down the road, let alone 40 years from now when you’ll want to retire. If I had more money right now, I’d be investing it. I’m eager to get my taxes paid so that I know how much I have left over to put into index funds…
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Thanks for the tip J.D.
I’ve just read your article about index fund, good information. I makes me rethink in what to invest. I should consider this option too.
I’ve noticed a link, is Dowie’s article link on stock investments, but it doesn’t work, do you have that information somewhere. I would appreciate it.
Thank again J.D.
Michael
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I’m in my early 30′s and have no intentions of leaving the stock market. All of the people who panic and worry about their day-to-day balances really have made it much easier for me to be honest. I utilize a buy and hold approach and concentrate on large-cap companies with strong financials and long histories of increasing dividends year-over-year (and reinvesting all dividends). Needless to say that when the market drops, I get a little excited knowing that the lower prices will enable my dividends to purchase increased quantities of new shares. Granted, it takes quite a bit of research, but having both accounting and finance backgrounds helps tremendously in understanding how to read financials and avoiding the need to turn to media outlets for buy/sell recommendations and the rest of their propaganda. One thing I will look to and encoutrage others to use as a guide as well is to pay attention to insider trading. Not the illegal type, of course, but the legally -planned trades reported to the SEC. If a company executive is buying, then it is a sign of trust in the direction the company is going, and they would not risk their own money on a failing company. On the other hand, if executives are dumping their stake in their own company that is a sure sign of trouble.
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Thanks for the heads-up, Michael. Looks like they changed their URL structure. I’ve tracked down the new link for the article, and you can read it here:
The best investment advice you’ll never get
This was an important piece in developing my personal investment philosophy…
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Why should you accept losing money for 1, 2 or even 5 more years while this recession reigns, because the makret MIGHT be higher in 5-10? Today’s losses are bringing down your entire average, as opposed to say, purchasing a TIPS ETF or yes even hi-interest savings until the market turns around? This is the problem with a buy-and-hold-index-fund strategy. The market is going to have to earn a 75% return for index investors to get back to 14,000! How long might that take? That is one risky bet if you ask me, compared to a safe 3-4% return or better on a CD say, until the market shifts.
These are steps easily taken by any investor you don’t need to spend $$ on broker fees or management fees either. I think you’ll see many people losing – who will continue to lose big – by following yesterday’s strategies in tomorrow’s marketplace. JMHO
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I work in retail banking and all of my clients who are in the 50′s and under I’m telling them ‘Don’t panic, you have time.’ I follow this up with ‘Do you have any extra money you could invest, there is a sale on that you might want to take advantage of.’
Unfortunately, a large percentage of my clients these days are retired. For those in the market they’ve taken a terrible hit that they’ll never recover from. It then becomes a case by case process to determine how they want to handle things.
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Where’s the advice on becoming a hobo?
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I’m not panicking, I’m just going to ride this one out, and hopefully come out on top when the market goes back up. Don’t think of the market as down, think of it as everything’s on clearance sale.
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JD @ 10, isn’t it possible that people with less money panic and move their investments into something safer precisely because they believe they can’t afford to lose what little they have?
If you have enough money to be comfortable, then it’s probably not that terrible to think about working a few more years, cutting out one or two overseas vacations, selling that second house, etc. If you don’t … what are you going to do, work till you die?
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I’m listening to Jim Cramers [audio] book, Real Money right now, and the advice given by USA today seems to come right out of his book, broken down by decades.
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Hmm I’m not sure I agree with the “in your 20s” advice to pay off debt when times are bad. Isn’t that exactly the opposite of what you want to do?
When prices are low TODAY, you should use your money to buy investments instead of paying off debts so that you can get great returns TOMORROW.
When prices are high TODAY, buying now will surely result in low gains or even losses TOMORROW, so since there’s nothing else better to do with your money, you’d use it to pay off debt.
So shouldn’t one buy in bad times and pay off debt in good times?
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@SueC:
Declines are an inherent part of investing. Markets rise and fall constantly, so anyone who expects to never see declinesin living in a bubble. The point of dollar cost averaging and dividend reinvestments is to take advantage of the dips to lower the average cost of holdings during the low periods. Especially when you consider the history of some of the better companies paying 4%-7% dividend yields, that sure outshines any CD and again, the reinvestment of the dividends only adds to the value. CDs are safe, but what happens when the FOMC decides to cut rates again and the CD rates drop in order to stimulate the market? Sure those who are already locked in are in a pretty decent position, but once they mature, and the renew rates are below 3% they are left holding the bag. Lastly, it is never a smart idea to have al of your money tied to one investment vehicle, be it stocks or CDs. The key is to be well diversified and use the cash position of your investment strategy to help offset losses until the economy restarts and the recovery begins.
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Michael @ 20 – I think the advice to pay down high interest debt is so that they are in a better position if the general bad economy turns into a specific don’t have a job economy for them.
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I agree with @Michael:20 and @Amber Weinberg. Now is the perfect time to be an investor picking up bargain prices on good companies. The market is down because news of the failures of the financial services firms is over shadowing the market. This is psychological.
Read what Rule #1 author Phil Town has to say here: http://www.philtown.com/
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@Sue (#14)
My personal belief is that the time to move into safe CDs was when the market was high. Now that it’s significantly lower, I want to buy stocks. Your mileage may vary.
@Emily H. (#18)
Yes, you’re exactly right. It may be that people with less money panic because they’re afraid of losing what little they have. But by doing so, they lock in their losses. This is why it’s important to have an understanding of the market’s history before investing, and why it’s important to have a plan.
@Michael (#20)
First, not my advice — USA Today‘s advice. Second, I often wonder the same thing. I’ve been thinking lately about when it does and does not make sense to pay off debt. If you can buy stocks “on sale”, as many of us believe you can right now, does it make sense to prioritize debt? What about during times of inflation? If the value of the dollar is dropping, doesn’t it make sense to wait to pay off debt because it is, effectively, declining with time. (This is one of the arguments against prepaying a mortgage, after all.) Interesting question.
Jessica (#16)
I wanted hobo advice, too, especially after that tease in the lead! (I even searched for a Public Domain hobo photo to include with this post, but couldn’t find a good one. No joke.)
Okay, enough comments on the comments. I need to write actual new content for the future.
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Speaking for the 60′s category…I was planning to cut my hours so I could do a better job of keeping up with paperwork, housework, and get back to canning and dehydrating and some similar projects and then retire next year. Doesn’t look like that is going to be a good plan. I don’t have the energy to handle additional part time work, so continuing full time seems my best strategy. Fortunately I have an office job. It is great advice to delay taking social security unless you were a carpenter, carpet layer, or other trades worker…lucky if their bodies have not worn out by age 60.
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JD@24: I’ve been grappling for some time now with whether or not to make mortgage prepayments. While I certainly would like to be debt-free, the numbers just don’t add up.
I’ve been trying to do research about the pros and cons of mortgage prepayments. Most sources I’ve read just regurgitate the old adage: “if your mortgage interest is more than what you’d earn elsewhere, then you should pay off your mortgage.”
While that sentiment appears to make logical sense, it doesn’t give us an objective numbers-oriented view of what’s going on. I’ve been trying to answer the question: “what really happens when you prepay a mortgage? What exactly in cold, hard numbers is the financial effect of mortgage prepayments?”
Since I’ve found no sources talking about the true numbers behind mortgage prepayments, I decided to try to create my own mathematical model. I turned to Net Present Value, one of the few unbiased calculations of an investment’s worth.
When you pay off your mortgage early, you’re essentially shaving off mortgage payments at the end of your mortgage. There are two important, negative consequences of this:
1) You do not improve your cashflow TODAY. You’re paying a bunch of money TODAY to avoid making a few payments at the very end of your mortgage. Making a prepayment now doesn’t allow you to skip next month’s payment. You’ll still have to pay your mortgage next month. And the next. And the next until you near the very end of your mortgage.
2) The payments you avoid are so far out in the timeline that their present values are really really low. This leads to a pretty crappy NPV return on your prepayment investment.
Now the one thing I do not take into account here is that when you make prepayments, your immediate future regular payments pay down more of your principle. However amount of extra principle paydown is so small that it’s almost negligible.
So unless you are committed to doing absolutely nothing else with your money, you shouldn’t make prepayments to your mortgage.
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I’m 33; my wife is 25. We both have fairly recession proof careers: she’s an RN; I’m a tenured teacher. We max out both our Roths. I contribute 10% to 403b, she contributes 8% to 401k. We live in a rental home that is owned by the school for which I teach and the rent is 50% of market value.
My question: In about three months we’ll be completely debt free (her student loan, our car loan). We’ll have more capital to save. Presently our emergency fund is about $3k. After we are debt free are we better off bolstering our emergency fund or increasing our investments while prices are low?
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One thing I don’t see mentioned is emergency fund or cash on hand. Regardless of age or debt load I think everyone should increase their emergency fund. Sure, no one wants money sitting in a bank account getting very low interest, but in these uncertain times you need to have a bigger safety net. I’d think at the minimum you’d want 10% more in your emergency fund – that is if you have a stable, certain job and little debt. If you have an uncertain job or a lot of debt you might want to go up as much as 50% or more.
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@Eric, “history” is the problem here, this is history-making, you can’t rely on history. (I recommend the book, The Black Swan, to anyone touting “historical” returns. It makes a scary read today.) Yields are offset by losses, and if the market is headed lower, you won’t see those high yields forever. (Avg S&P div is 3.39% – I’ll take my locked in 4.5% CD over that thanks.) So to bank on yields is market timing of another sort.
@JD what if we’re only 1/2 or 2/3 way to the bottom? I suppose it depends on where you think the market is headed over the next year or two. If consumers are screwed in 2009 by job losses, foreclosures, bankruptcies and wage stagnation, where will be the earnings to support stock price growth? It will depend on what the bailout actually puts into people’s pockets.
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Thanks, as someone who is in their 20′s and usually has a more short term mentality with spending and saving, it’s sometimes hard to get good advice.
Craig
http://www.budgetpulse.com
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The most important message I’ve heard so far was from an old guy who remembers the Great Depression: those with cash are going to find some good deals. That’s been how people make money during a recession. Keep your eyes open.
We’re in our 40′s with 2 young kids. We’re sitting tight on most of our investments to avoid locking in too many losses. Most of our money is invested pretty moderately, except for a percentage “we could afford to lose” — employee stock purchases, etc. We’re reinvesting dividends and looking for buying opportunities.
On the home front, we’re reducing our monthly expenses and putting as much into cash reserves as we can. We have only affordable mortgage payments as ongoing debt right now.
If I was in my 20′s right now, I’d likely be putting a lot of cash away in a high-yielding FDIC-insured savings account until I felt I had enough to weather most foreseeable catastrophes (lost job, medical issue, dead car, etc.). Then I’d pay off every single consumer debt I had. Then I’d start looking for buying opportunities in the stock market and real estate and putting some money into my retirement savings. And if I didn’t have any kids and thought my job was safe, I’d be considering a trip to Europe and China, now that the exchange rate is better and the tourism industry is nervous.
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Sue wrote: @JD what if we’re only 1/2 or 2/3 way to the bottom?
This is the real question, isn’t it? Each of us has to make our decisions based on what we think will happen in the future. The problem, however, is that people generally base these decisions on the recent past, which, as has been demonstrated many times, is actually a poor predictor of the future. That’s why so many financial writers warn against market timing. Nobody can do it reliably. Yes, it’s easier to time broad swings of the market (as opposed to daily fluctuations), but it’s still a bunch of guesswork.
If you believe the market will continue to decline, then don’t buy stocks. If you believe the market is low, then do buy stocks.
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I hear of so many people that are not sure if they should buy are sell. And I can relate to the concern that many our having with stocks right now. But, sometimes I look at it this way:
Imagine, if you would, going to the supermarket with your grocery list in hand. “Lets see; I need eggs, milk, cereal, some chop meat for dinner tonight, and some chicken for next week, the baby needs formula, and the twins want ice cream. And of course, we must have fresh vegetables, and fruit, and some more bottled water.” As you enter the supermarket you are startled by a huge ticker type sign that flashes… “Every item is discounted by 75% of its true value until further notice” But then in small writing you see this… “Please be advised that these items were originally selling at 2-3 times their true value. Note – nothing about these items have changed. The ingredients, the expiration dates, etc.,. are all the same. The only difference is that we are now selling at a deep discount due to circumstances beyound our control.”
These discounted prices may be discontinued at anytime.
Would we be asking ourselves…. is now the right time to buy?
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@SueC:
Everyone sees thing their own way. You see yields being offset by share declines, but I see dividend yields as offsetting share price decreases (net effect is equal). I just happen to understand that people will panic when they do not fully understand how the stock market works, which leads to massive sell-offs. Strong company financials, particularly those of consumer staple companies cannot be argued with. Like JD said, simply do not buy stocks. The market is no sure thing, but without taking some risk you cannot achieve any reward. I’m more than comfortable with my diversification levels, and have no worries about my financial position. You are more than entitled to your position on the subject.
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Amen to that; focus on your behavior, not your balances, in a Bear market.
I am pretty tired of all the ‘sky is falling’ anecdotes out there that CNN/MSNBC and the other usual suspects are rolling out on a daily basis.
I have yet to see an intelligent, thoughtful piece on how now is the time to focus on your behavior in the form of getting your financial house in order and establishing good financial habits (good advice regardless of point in economic cycle, but resonates most in downturn).
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I’m in my 20s with no debt* or kids and am still buying stocks. In fact, I shifted my 401(k) to 95% stocks and am also investing in ETFs** through my other accounts. This is all money that I can’t or don’t expect to access for decades, and while it’s scary to look at the paper losses that have occurred, they’re JUST paper losses until you lock them in by selling. The market is on clearance (not just regular clearance, but Black Friday-level clearance), so I’m spending on equities rather than HDTVs this season.
That said, I took care of first things first, with my 1-year emergency fund/house downpayment in savings. As JD keeps reiterating, it’s important to protect yourself by saving up an emergency fund– and make sure it’s liquid.
*Well, I have med school debt, but it’s locked in at such a low rate that it makes more sense for me to pay it off over 30 years instead of prepaying.
**I posted about some ETFs here:
http://renaissancetrophywife.wordpress.com/2008/09/22/etfs-everybody-trusts-finance-schmucks-right/
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Personally, I am one of those with very little in investments 403b and IRA. I dont want to lose anymore than I already have because I lost a ton in the dotcom crash previously being invested in so many tech funds. I moved everything to bonds recently after seeing 50% decline in my money (I am not currently contributing so DCA isnt working in my favor). I will diversify and move some things back into index funds when we clear some of this financial mess. However, I have yet determine when to qualify in my own mind when that is yet.
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Great advice though is it is same as the advice given when times are good. I guess for me its a good reminder. I am almost 30 with a little debt (medical) and can’t wait until that is paid off. I have <$5000 left and soooo envy other young people who are debt free!
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My mother is in the almost 60 category and is an RN. The problem is, the first 20 years of her career was working through a registry = no retirement. She is already working full-time, no debt but with extensive on the job back injuries her out of pocket medical expenses are high. She doesn’t know what her options are at this point. Working part-time is not an option. Any advice?
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@Finance Girl:
I actually wrote a piece the other day about not waiting until new years or any other future date for getting your financial house in order. Any time is the right time to do so, and it should be done on an ongoing basis, not just once a year or when bad things are happening around us.
Forget New Years, Start Making Your Financial Resolutions Today
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@SueC,
In every bull and bear market people claim the rules have changed this time. They didn’t during the .com bubble or after 9/11 or during the recent housing bubble and I doubt they have during this downturn either. I would be very careful about putting too much into CDs- if we have high inflation that will eat away your principle.
No one can predict where the market will go, it may well go lower- as long as it recovers in the next 30 years my retirement should be OK. If you wait for an absolute bottom you will never invest! Since the future is uncertain why not try dollar cost averaging? Invest a small amount each month so you don’t buy at too high a price.
This strategy will minimize your investment risk as you won’t put all of your money into the market at once. Also, why not put a certain % in cash equivalents, a certain % in stocks and rebalance? If the market goes down you use some of the cash to buy stocks at a cheaper price, if the market goes up you lock in gains by selling stocks. It is the same old boring investment advice but it does work. Jumping in and out of investments has been proven NOT to work.
-Rick Francis
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if the decline of the american empire is here to stay, i say investing all your money in the stock market is financial suicide.
i have invested in the s&p 500 since 1997 and i get 0% return on investment. so much for long term investing.
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Michael@26
You stated that paying down your mortgage only cuts your mortgage short. That isn’t 100% true. Most note holders will re-amortize your loan under certain conditions. What a re-amortization does is reset your loan to the original payoff date, but with corresponding lower payments the reflects the reduced balance.
My CU will do this on any note they hold (house, car, etc) once for free and for a small charge thereafter. My mom checked her mortgage when she retired and they said if she put in $5k all at once they would be happy to extend her loan and drop her payment. I assume other banks have their own rules. So if you are more concerned about monthly cash flow call the bank that owns your note and ask about their policy.
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rubin pham (#42) wrote: if the decline of the american empire is here to stay, i say investing all your money in the stock market is financial suicide. i have invested in the s&p 500 since 1997 and i get 0% return on investment. so much for long term investing.
You’re right: if the decline of the American economy is here to stay, then investing all of your money in the stock market is financial suicide. I don’t think anyone argues with that. If you buy that premise, then don’t invest in the stock market. I don’t buy that premise.
Also, 11 years in the stock market is not a long-term investment. It’s a medium-term investment. A long-term investment is 20 or 30 or 40 years.
Again, each of us has to decide our own risk tolerance, decide our own goals, and make our investments based on these.
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Plus the value of a stock isn’t only the price per share. It is also in dividends. Just because the S&P500 hasn’t increased in value doesn’t mean you haven’t made any money in that time.
And if this IS a bottom we might see DJIA value 25-50% higher than it is today within a year or two. Will all the doom and gloomers then say that stocks are the only way to go because of the amazing returns?
Finally an interesting point my husband made when things started going down was that in his advanced statistics class his teacher said that there are limits to the expansion rate of a human system (which a company/stock market is). If you look at the DJIA over the long term 14k was high, and 8k is low (when compared to history and these human system limitations). His math says it should be 10-12k right now. That isn’t to say what WILL happen, but it gives me faith that right now is a bargain and things will go back up. It will also inform my decision of when to sell.
JD linked to another blog not long ago and the guy had a good point. We don’t have the many of the physical and economic conditions of the 1930s. Things might be touchy right now in the economy, but overall things don’t look so bad. They aren’t wonderful, and they could always get worse and change my mind. But right now the fear and panic are feeding fear and panic. It is a numerical problem (the $ value of stocks) more than a physical problem (drought/disease). When things settle down and calm sets in again I don’t see any reason why things won’t turn up.
And for those of you waiting for things to turn around before you buy, by the time you realize things are better so has everyone else and most (if not all) of the bargains will be gone. Be careful because that thinking is what leads people to buy HIGH/sell LOW.
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@rubin pham:
Having all of your money tied up in ANY investment vehicle is a poor way to go. Diversification among vehicles (ie: stocks, bonds, free cash, CDs etc.) is just as important as being diversified across equity/fund categories.
@Shara:
Exactly the point that I was eluding to. Dividend payouts are also an importantfactor to keep in mind when discussing stock value and returns. Value is always relative. If you purchase now, even a 15% gain down the road will look good compared to watching your portfolio erode by 70% then gaining back 50% later. Unfortunately many people do not have a very strong foundation when it comes to the stock market and it’s workings and they only know what they catch a glimpse of on tv. It is very important to understand that downturns and recoveries are all part of the nature of the beast and that emotion needs to be taken out of the equation to see things clearly.
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If anyone is worried about the end of America as the major world power I suggest you read 2 books. One is The Post-American World, by Fareed Zakaria. This book really got me thinking. He gives good reasons why the US won’t be the premiere world power, but its not all gloom and doom. Part of what made us grow was globalization, and eventhough it will make us second in the world, it will still allow us to continue to grow at incredible rates.
The other book I recommend is Hot, Flat, & Crowded. Another book that made me really think. I think Friedman has something here, if America and its great innovation can lead the world in the Green Revolution it will be our next Industrial Revolution and keep us as the major world power for a long time to come.
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Sometimes the best way to “invest in a bad economy” is to keep as much of a positive attitude as possible.
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JD, I have to strongly and respectfully disagree. The real formulation of the advice should be “If your stock valuation has fallen to the point where the % of your net worth in stocks is below your target asset allocation for stocks, then buy more stocks. If you are above your target allocation for stocks, then do not buy stocks.”
It is precisely these times of “panic” that give us reason to have an asset allocation that makes sense and stick to it. That means that during great market highs we should be hedging our bets with the proper amounts of bonds, cash, and metals. And even more importantly during great market lows, we should not be deviating from our plan to have a certain percentage of our net worth in domestic and foreign stock.
Watching graphs does not provide you with new information; it provides you with new emotion. If you have learned something fundamentally different, like say on this site, and that has caused you to change your opinion about your long term investment strategy, THEN you can consider changing your target asset allocation. But that should be equally likely in great market highs as in great market lows.
Emotion is the investor’s enemy.
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A challenge for all readers, based on a very interesting conversation I had last night with a good friend:
Review all of the little investment chestnuts touted by brokers, media, etc., then look at who benefits from “dollar cost averaging,” “buy and hold,” and “you can’t time the market.”
Who benefits from these notions not matter whether the economy is going up, or going down? More to the point: do you benefit more than your broker?
His assessment: brokers benefit at our expense, no matter whether market goes up or down.
Personally, I got out in August and October 2007 when the insanity just too absurd. Balance sheets are a joke. How could any retail investor make an informed decision about the financial health of a company when companies are allowed to hide liabilities?
It’s just not possible.
I’ll be back in the market once unemployment starts to go down instead of up, once fewer people are “investing,” once we have a plan for dealing with $50 trillion liability, when we are out of deflation and into inflation, and once I am confident the USD isn’t going to flat default. I expect to be out another couple of years.
In the meantime, my 3% interest on my CDs is beating the market very handily.
BTW, cost escalation AKA higher prices is not inflation. Inflation and deflation are defined by the money supply. If you wonder why our financial Masters of the Universe are printing so much money at the moment, it’s because debt default and demand destruction are proceeding even more rapidly than the Fed has guts to print. Inflation will come though… just not here yet.
Think outside the box. Who says you can’t time the market? Have you tried?
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