Sep 25 2008
Do we ride out the market decline?
This is truly the time when you want to pull out your hair. On one hand, some financial gurus point out spans of time when money invested in the market would have needed 20 years to have recovered. Then you have other financial experts who tell you that you won’t lose money if you don’t sell. What do you do now? The answer: it depends.
Here are some of the questions about your money. Are you managing it or is someone else? How often do you look at the bottom line? Should you be doing it yourself or is your money manager doing a good job? Have you been losing money or holding fairly steady? Do you pay a large commission every time you trade? Are there restrictions on those things in which you can invest? All of these are very important questions. This blog is for people who invest on their own, or who have more than a little bit of investing experience. But the novice can learn much here. Below are some things to consider when managing your accounts during these troubling times.
One thing: don’t count on your money market holding the dollar value for sure. That is one aspect of these government bailout talks right now, and the fussier the legislators become, the less likely your money market will hold its dollar value. In other words, if you put in one dollar in your money market, you are used to always having at least that one dollar. Now we are not sure if that dollar will stay worth that one dollar.
Second: High yield dividend stocks usually hold their value, but not all are created equal. Look at our archives carefully for a few suggestions. See, too, that we have sold some that have lost their dividend.
Third: use forums like this for bouncing off ideas. If you ask on one blog for their opinion, then a few others, consider which one seems the wisest. All writers can do is offer their ideas, and some might be quite sensible.
Fourth: Don’t settle for lame advice. I recently looked at a blog that advised, “Watch your money!” The writer then proceeded to tell readers to not spend foolishly and a few other elementary ideas. Wise money management needs to be a lifelong habit, not something you only get serious about when something’s wrong in the economy. You need much better advice NOW with real answers to hard questions.
What kinds of questions should you be asking? First, call your broker. Is you account insured in any way? For how much? Most investment firms do not have FDIC insurance. Buy many offer some insurance of some kind. Next find out how many of your accounts are covered. We, for example, have our Roths, Children’s Roth, and a regualr investment account. Are all of them covered or do only one? These are questions you should know. If you have a medical savings account in the same company, consider sending it to another brokerage. Reacquaint yourself with your holdings and familiarize yourself with what each holding entails. For example, what does your mutual fund say it is supposed to invest in? How much has the value changed this last year?
Develop a realistic plan to pay your bills should the whole money sytem freeze up for a day or two. Put aside as much as you can in an envelope in your safety deposit box. Does this Last, I wouldn’t ride out this market if I had dangerously exposed assets. Mutual funds that are large growth or blue chip probably will get creamed. Even commodities are taking a beating. I don’t know when steel will turn around, and while ag commodities have been blizting, the ETF has not been reflecting that! That’s why this is so dangerous. Putting it in the money market is even dangerous now. Only precious metals and oil funds seem to be retaining their value.sound nuts? Well, let’s put it to you this way: Fox News interviewed Warren Buffet today about the government loaning money for a bailout, and he said, “Heaven help us,” if they fail to provide that money. He is a very practical man, not given to drama. If the man says it’s bad, it probably is. What’s the worse that can happen from this advice? Sometime you open your box and have a stash of money? Ooooh, very bad, right? Wrong! You can’t lose on this piece of advice.
Last, I wouldn’t ride out this market if I had dangerously exposed assets. Mutual funds that are large growth or blue chip probably will get creamed. Even commodities are taking a beating. I don’t know when steel will turn around, and while ag commodities have been blizting, the ETF has not been reflecting that! That’s why this is so dangerous. Putting it in the money market is even dangerous now. Only precious metals and oil funds seem to be retaining their value.
What is the worst that can happen? you ask. The worst case senario is that our money becomes worthless, jobs are lost, and we enter ten years of little money with declining numbers of jobs. The problem is we are very close to that. Then we would wonder if we would even get our dividends from our stock! Precious metals will reign.
I’m not saying the sky is going to fall. I’m saying that it might, and you should be ready. Share some thoughts and ideas here for others to see and keep listening to the new information daily.
A friend of mine recommended a book several weeks back that I think was called “Reinventing Collapse”. It was written by a Russian who chronicled the collapse of the Soviet Union. I have not read it, but here are some of the things that we spoke of, many of which were in that book.
In the collapsed Soviet economy, the ruble became worthless (for a while at least) and no one had many of them anyway. It was both inflationary (the money buys less and less because it’s value is dropping) and deflationary (no one has any money to buy things) at the same time. This is unprecedented. There were two things of value for people who got through it.
1) people needed a community: family, church, neighbors, friends, so they could work together to share resources and survive.
2) people needed to have resources with some intrinsic value such as food, tools, seeds, gasoline for both use and barter.
My friend did not mention precious metals. I’d expect them to be useful as a means of exchange for large purchases (who really is going to have 200 bushels of soybeans on hand to pay for a parcel of land, for example) although limited in use for smaller purchases because most people are going to think in relation to their stomachs and you can’t eat them if things get/stay really bad.
The pre-collapse economy of that time bears striking resemblence to ours currently. That does not mean that ours will collapse as theirs did or as far; we theoretically have smarter people running our government, and independent currency, and a much larger economy that should be able to fall a lot further before anything approaching the Soviet collapse happens. But there are a few things to consider:
1) Our culture does not connect, share or work with a community easily or willingly. We run from our nuclear family as soon as we are of age, distrust our neighbors, don’t go to church, don’t volunteer the way we used to and etc.
2) We are wholly unprepared for hard times. Few people can, dry, freeze or store their own food, or have adequate stores of food, money, or useful supplies on hand for difficult times.
3) Unlike the Soviet Union, we expect our government to help us, solve our problems and bail us out when we are insistently, phenomenally stupid (for example, Ike is coming and we tell the people to move or die. Not only do we not let the dumb ones perish, we spend millions trying to rescue the idiots and it’s paid for by the government, that is us). In Russia, the best government is one that doesn’t notice the people. Only bad things happen to a community there once they hit the government’s radar.
3) We’re better off, in my opinion, to not bail out the billionaires. I doubt it will work; do you really think that just because we’ve given huge money to all the current rich beggars that more lunkheads won’t appear? We have too much debt and no plan to pay it off. Even the government is saying that 700 billion is just a start. With that much money you could spend 400 billion and go solar with all our energy needs (Scientific American Jan, 2008 cover story) forever solved, spend 100 billion on head start, teachers, schools, child care after school, mentoring and still have 200 billion left over (maybe work on fixing health care?). Or you could pay off every home mortgage in America. I’d rather let the economy correct, contract or collapse and have some resources left at the end to plan the climb back out of the pit. I bet we see the next president give us the Bill Cosby shrug and say “Well we tried; we did everything we could and now we need to do what China (or WalMart or Wall Street or the Fed or the North American Union) tells us we have to do because we have nothing left and they’re willing to help (for a price).” Let’s pray it’s not that way.
David
What an interesting commentary! Thank you!
You are right about the collapse of the Russian ruble. I’m not certain their situation was so different from many others that had gone through a similar thing, thoug the deflationary and inflationary juxtapositions surprised me. That they were unprecedented.
You are right in that we are less prepared both socially and physically for a collapse, though the Mormons constantly teach that people need to have one year’s food on hand for any number of emergencies. Plus they do watch over their people quite well, too.
The thing is, no one can predict the outcome of an emergency. For example, I discussed this with a Mormon friend of mine extensively. I told her that in the even of an invasion, if you became a refugee, you couldn’t take along your supply of food. We decided that an emergency mobile pack per person would be critical. But then scavengers would probably take your stuff anyway. I pointed this out because of the Bosnian war and all the people who fled from their homes.
You don’t keep precious metals on because someone will steal them, you keep them on because a seller off goods hopefully will recognise something of value. No, she or he will not probably have a gold metals worth of wheat for you. But a storeowner might part with a loaf of bread for a silver quarter. That’s why you should always have a bag of junk silver. A smart landlord may take a gold coin for two months pay of rent.
As for the bailout, I don’t care as long as we make money on the deal, as long as there is new legislation holding execs pay to a more reasonable level, and we as investors can jump in and make a buck. I noticed that Buffet said that if Congress doesn’t act, then heaven help us all, and that tells me that something very bad will happen otherwise. I would rather they walk along with banks, helping them go under like they did for WaMu rather than this bailout, but there’s a lot of details I don’t know. So since they more than likely have been given more facts, then hopefully our elected leaders will act in our best interest.
Thanks so much for your thoughtful comments. I love hearing from you and you add so much richness to these discussions.