The Half Time Report from the Financial Sidelines
Lee Rosenberg, CFP | October 23rd, 2008
Given the daunting political and economic climate, doesn’t it sometimes feel like we are spectators watching an intense football game where everything is on the line and the score keeps changing? We go from cheering (our candidate is up 5 points in the polls) to panicking (the stock market is down 900 points). We go from relief (gas prices are under $3.00 a gallon for the first time in a year) to shock (the quarterly statements arrived and we’d rather not look).
Now that the bailout has been approved and the election is around the corner, it might be half time. But in spite of how sure the pundits sound about the outcome, this game could go either way. Nobody really knows who will win the election and if our financial futures will improve after the new president is chosen. Nobody really knows if the bailout will bring the economy back from the brink, or if a new administration will succeed at creating policies that make a difference.
So the question is, now what? How do we make investment decisions when there are no certainties? Do we throw a hail Mary pass into a whole new investment strategy or do we stick to the playbook in spite of the fact that we’re losing badly?
In my opinion, in light of this market volatility, we still need to focus on the positive aspects of this latest
financial crisis. The strong demand for oversight and the cooperation of Wall Street and congressional leadership to right the wrongs will serve us well going forward. Meanwhile, the federal government will not allow the banks to fail, congress passed the bill to increase FDIC insurable limits up to $250,000 per account, the bailout was approved, world financial leaders are meeting to develop strategies that will strengthen the global economy, interest rates have been cut and mortgage rates have declined, making it more affordable to buy a house, and there is talk of a second round of tax rebates to stimulate the economy. This is not to say that there will be overnight turnaround, but it does give us hope that these corrective measures will return us to solvency and even profitability.
What I Know that You Might Not
Q. How can you be so sure that the stock market will recover?
A. Because historically the stock market always rebounds, it’s just a matter of time. In the past twenty-five years, for example, our economy has endured a major savings and loan crisis that involved losses of over $500 billion in assets, the dot com bubble, major accounting scandals that threw companies into bankruptcy (think Enron), we’ve seen tech stocks plunge, housing and mortgage losses, runaway debts, yet none of these has obliterated the markets. Even now, with every day bringing another round of dismal earnings reports and predictions, it would still not be wise to bet against the long term potential of the market. Yes, stocks are trading much lower than in the past eight years, and yes even bonds haven’t held up under the weight of all the turmoil. But the point remains that in the long run, there is nothing more promising for growth and beating inflation than equity investing. In fact, it would be wise to be bargain hunting, as some stock prices are cheaper now than in the past two and a half decades.
Q. What should I do now with my 401k?
A. Most 401ks consist of two types of money. Money you have already invested and allocated in the accounts and the new money/deposits that will be flowing in to invest as you choose. For many people, the retirement investment strategy has been the same for both previous and new investment dollars. But with this drastic market volatility, it requires a new way of thinking about 401k allocations. In many cases, the new money, which trickles in paycheck by paycheck, offers the best opportunity to buy investment assets that are now at sale prices never imagined only a few years ago. Many sectors are very attractive at half price, such as technologies or blue chips. However, if you have a large lump sum that you have amassed over many years, this is money that you would be reticent to continue having at the full risk of the market. This money should have a more conservative, less volatile allocation, which could include bonds, short term treasuries and money market accounts.
Q. Should I stop contributing to my retirement plan because it seems like I’m losing all the money I put in?
A. No. Do not stop contributing to your retirement plans. Keep in mind that with each deposit you earn a tax deduction, which can save you anywhere from 15% to 35% immediately. And although the market is volatile, consider that you are not only buying in at lower prices right now, these deposits are intended for your long term retirement goals. By continuing to invest, you are giving yourself the greatest opportunity to recover from your losses during the down market.
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Tags: 401k, financial sidelines, lee rosenberg, personal finance, retirement plan
About the Author: Lee Rosenberg is the Co-founder of ARS Financial Services, Inc. As a Certified Financial Planner with more than 34 years of solid financial expertise. Lee is a registered representative of Cadaret, Grant & Co., Inc. He was also named one of the top 25 Independent Financial Advisers in the US by Rep magazine.
