Wednesday, November 4, 2009

Economic Highs and Lows

After a third quarter that dazzled like a diamond in the pile of coal our economy had been for the prior year and a half, we seem to be standing at a crossroads.  The stock market seems economically cheery, but most of us are not.  What's the best action to take in times like these?

I.  Define your goal in dollars

This sounds simple, but is not.  As a matter of fact, if it's done properly, it requires soul searching.  What is your economic goal?  Not your neighbors', not your friends', not your colleagues'.  Yours.
To know that answer is to define what makes you happy.  If you're doing the things that make you happy, then all you need to do is write down how much you spend on your happy life, and ensure you have the means to live it.
If you're not doing the things that bring you joy, however, this is a big job.  You need to visualize yourself in your fulfilled state, and calculate its economic cost.  That may take some time.
But, it's an investment well worth your effort.

II.  Identify your financial challenges
  • DEBT
Now, we're going to do the things that will get you to, or maintain your happy life.   If you're paying off debt, especially credit cards, your first step is easy.  Keep paying them down.  This is the singularly most treacherous obstacle to financial health.
But, what if you were on the verge of retirement, and all of a sudden, BOOM!  You heard the sound of your crashing 401(k).  Or, what about any of us that are on the path toward financial security, but not there yet?  What is the best course of action to take now?
First of all, as you have seen from the stock market's 60% rise since March, selling in a panic is a very bad idea.  If you did, you learned a valuable, if expensive lesson.  You sold when you should have been buying.  You learned why billionaire investor Warren Buffett says, "Be greedy when others are fearful, and fearful when others are greedy."
If you didn't sell, you're down 30% from the highs, and wish you'd invested more earlier in the year. I advised moving back into the markets slowly last November in order to "buy low."  The price of stocks is not as cheap as it was then.  So what do you do?
First, you put nothing into the market you need within the next five years.  You NEVER put money into the stock market that you need in the next five years.  The last year is a perfect example of why that is true.
Next, you realize that, at the last market top the price (or P/E) was 19.7, and at the last low, it was 10.3.  We're at 16.9 - not cheap.  So, it's very important that you think very carefully about buying stocks that have gone up in price very quickly, like Apple, Google and AIG.  A safer strategy right now is quality value stocks, like Microsoft, GE and Bank of America, whose prices have risen less quickly.
Finally, be judicious, but keep investing.  You're not buying on sale, so don't buy all at once.  Buy more when the market is down, and less on days when it's risen quickly, and put in a little every month rather than a lot all at once. 
But, keep in mind this is where your investments return more than inflation, and don't be deterred in saving for your goals.

III.  Watch your personal sentiment
The positive outlook for the US investor is very high right now.  Warren Buffett's advice is worth repeating here, "Be fearful when others are greedy."  Yet, the sentiment outside of Wall St. is decidedly more somber.
Here, we are discussing your personal sentiment.
No one is advocating a Pollyanna attitude.  Things are tough.
But, it is under our complete control how to face our tough situation.  One of my favorite stories about Thomas Edison included his reaction to a devastating fire that destroyed much of his expensive equipment and scientific notes.  Surveying the damage, he noted that, with "all the mistakes destroyed," he could begin anew with a fresh perspective.
Like him many women welcome less spending over the holidays, making gifts instead of buying them, focusing on spending time, rather than money on loved ones.  Some intend to keep these new rituals as part of their lives even after our financial challenges are behind us.
There is much to be gained by seeing obstacles as opportunities.

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