Some Points You May Want to Consider!

As we watch the current economic situation, there are several questions that surface.  Are we headed for another dip recession (I personally believe a double dip recession is crap, as we are in the second depression)? Is there going to be any improvement of the economic crisis or is it getting worse?  However, I think the most important question that most of us face is should I do something with my investments, especially 401Ks?

I am NOT a financial professional, although I do have degree in International Finance.  This is NOT to be considered in any way as financial advice, but I feel compelled to point out some activities that are currently afoot in the financial markets that you should 1). Watch closely and 2). You may want to consider taking some actions to protect what little investment you may still have.

If you watched the markets last week globally, you saw some real ugly volatility in the markets across the board.  Markets moving wildly up and down in the range of 2-5% daily!  That is NOT normal even in an uncertain market place and is indicative of some real anxiety among professional traders.

You and I do NOT spending our every waking hour to watch and act on our investments, so we are the sheep in this market.  So what should we do.  I don’t know about you, but I have become a real bear.  Most of us don’t make “short” plays nor does our 401Ks allow us to participate in some more of the sophisticated “hedging” strategies.  So what can we do?

The simple answer is above all else, don’t  watch the value of our portfolios get any worse.  I think any of us that have “skin” in the markets are teetering on a cliff.  Get out, park everything in money markets and let the dust settle.  Consider these “experts” thoughts of the few days.

Consider this excellent article by By Andrea Coombes, MarketWatch

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This doesn’t mean you must throw 70% of your retirement-plan assets into stocks. Your precise allocation will depend on how many years out you are from retirement, your ability to ignore the daily headlines and focus on the long term, and other factors. What’s most important is diversifying across a broad array of asset classes, rebalancing regularly and controlling your expenses.

Getting out while getting’s good

Maybe you’re envying your neighbor who moved all his money into cash in July or early August, before the Dow Jones Industrial Average DJIA +1.90%  fell a gut-wrenching 635 points on Monday, Aug. 8, then proceeded to seesaw, closing up 430 points on Tuesday, down 520 points Wednesday, and up 423 points on Thursday, closing out the week down just 1.5%.

Certainly, your neighbor was not alone. The U.S. debt-limit debacle, Europe’s debt crisis, ongoing fears of the dreaded double-dip recession and a general crisis of confidence prompted plenty of people to jump out of stocks in recent months.

Investors pulled a net $13 billion out of equity mutual funds in the week ending Aug. 3 (the most recent data available) — that’s the week before those four massive DJIA moves — up from the net $9.3 billion investors withdrew a week earlier and the less than $4 billion pulled out in each of the first two weeks of July, according to the Investment Company Institute, a mutual-fund company trade group. See the ICI mutual-fund outflow data.

Sure, your neighbor seems prescient. But does he know when to get back in? “Markets go up just as precipitously and as fast as they go down,” Evensky said. Read how the DJIA notched a gain of more than 7% in the three trading sessions through Monday, Aug. 15.

Retail investors like you and me are known for pulling out of the market — and then missing the rebound. From 1991 through 2010, the average annual return of the S&P 500 SPX +2.18%  was 9.1%, but the average equity investor return was a measly 3.8%, according to Dalbar, a financial-services market research firm.

Why? Because investors bought when stocks were on a tear, and sold when they fell in value. “It’s not because they owned the wrong investment,” said Scott Thoma, CFA, member of the investment policy committee at investment firm Edward Jones, in St. Louis, Mo. “It’s because they bought high, and they sold low.”

Focus on what you can control

Plenty of regular investors fear the system is rigged against them — that big-money investors with sophisticated trading software are stacking the deck against the little guy. But even the sophisticates fell hard “during the tech crash, during the last crash and probably during this one,” Evensky said.

Instead of worrying about them, Evensky said, focus on what you can control. For one, mutual-fund expenses.

David Swensen, chief investment officer at Yale University, said in a recent opinion piece in the New York Times that “even Morningstar concludes … that low costs do a better job of predicting superior performance than do the firm’s own five-star ratings.” Read Swensen’s piece on mutual funds.

While 401(k)s and other defined-contribution plans are far from perfect, most offer access to cheap index funds.

You also have some ability to diversify your holdings. In addition to U.S. stocks and bonds, consider emerging-market stocks and bonds, commodities, Treasury Inflation Protected Securities (TIPS) and real-estate investment trusts (REITs), among other options. Get ideas by looking at how the Lazy Portfolios are invested.

If you don’t have access to much variety in your 401(k), consider investing in that plan up to the full employer match, and then investing some money through an IRA to get access to more investment options.

You’re also in control of rebalancing. Once you’ve decided what percentage of your portfolio to invest in each asset class, revisit your portfolio quarterly. If necessary, sell investments that have grown beyond your target allocation, and buy more of those that have dropped below your target.

Understand risk

Investors tend to focus on market swoons, but that’s not the only risk you face. “In our definition, risk is not reaching your long-term goal,” Thoma said.

And don’t confuse certainty with safety. “Putting your money in CDs may feel very certain — you know you’ll get every penny back — but it’s very unlikely to be safe for most investors because there’s not going to be enough money to pay the bills after you factor in inflation,” Evensky said.

Another risk: Taxes. You’ll owe income tax on that 401(k) nest egg when you start pulling the money out. Read more: Higher tax rates loom for 401(k) savers.

And keep in mind, that “lost decade” wasn’t so for everyone. If you put $10,000 into the S&P 500 in 2000, you’d have about the same amount in 2010, Thoma said. But investors who put in $10,000 over time in regular monthly installments? “Their money would have grown to over $14,000 during that timeframe, if you were in a 65/35 portfolio,” Thoma said.

“It’s because you invested over time,” he said. “A lot of your money was invested lower and benefited from that recovery. That’s where people have to focus more often than not.”

So, the bottom line is pay attention, be sure you have the flexibility to move in and out of the stock market and mutual funds without penalty and fees.  Since we are now at point where we are at what is called a “Death Cross” in the markets (that is where the 50 day moving average is crossing over the 200 day moving average, it is a bear market). So it is a time to be a bear!   Your broker may say otherwise, but he or she has “skin” in your game either way!  It’s your money and you should call the shots!


Author: redhawk500

International business consultant, author, blogger, and student of life. After 35 years in business, trying to wake the world to a new reality. One of prosperity, abundance, and most importantly equal opportunity. it's time to redistribute wealth and power.

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