Recent Stock Market Movement

As I expected, the drop of over 1000 points from the DJIA recently has pushed the DOW near 10,000 once again and not unexpectedly, we have a little bounce above 10,000 today as bargain hunters look for opportunities.  With another big drop yesterday, I received a call from my sister asking what I thought about the recent downturn.  My response was that she shouldn’t be concerned about day to day movements IF she has her portfolio positioned to represent her risk tolerance.  That’s what I have done and I can go about my daily life without fretting about what the stock market is doing because I have a plan.  Do you have a plan?  Do you understand what has been happening in the markets the past few years?  If not, read and learn and get the help of a competent professional if you are uncertain or afraid.  There is always risk in investing, but there is also risk in not investing.

The best thing you can do to sleep better at night is understand the amount of risk you are taking to achieve the return you desire.  Risk tolerance changes for most people over time, so look at when you need the money you are investing.  Remember to think about your money in at least three time frames - short term (up to 2 years), midterm (2-10 year needs), and long term (10 years or more) so you have a plan for the future and can still take advantage of growth to meet your goals.  You do have goals, don’t you?

Personal Finance Blogs and Saving

I took some time yesterday to look at a few personal finance blogs.  My daughter has been telling me about those that she follows, so I checked one out.  That blog is The Simple Dollar.  The author has a “picked myself up from financial ruin and improved my life” theme and he appears to post good common sense - which as you recall, is not so common anymore.  Reading his blog made my always synergizing brain start pumping out ideas for posts.  The real life of someone else is always a touch stone for others, whether they shake their heads in disbelief or nod because they relate.  The particular post I found interesting concerned snowflaking as a method to reduce debt or increase savings.  It is all about forming positive long term habits.

My Method for Saving While Still Having Fun

I always encouraged my daughters to save.  And those lessons carry forward because they are both still savers and investors.  That doesn’t mean they don’t have fun and spend money.  It just means they are intentional about their spending.  Being frivolous was not a way of life in our household.  It is something you do once in awhile to have a fun moment that you remember with glee.

So what is the savings lesson?  When I was a financial advisor I taught that there are 3 types of saving - one for short term or emergency needs, one for midterm needs (3 - 10 years) and one for long term needs (10 years or further away).  I am no longer an advisor and this column is not intended as professional advice.  I just know a lot about it and like to share ideas that can be helpful.  It is always important to have money tucked away in very safe accounts to meet those short term needs.  If your car breaks down or you have to go to the dentist, or some other non-negotiable event occurs, you need to be able to pay for it without racking up debt on your credit cards.  This money can’t be risked.  General guidelines will tell you to have 3-6 months worth of living expenses.  I say work towards a year’s worth of cash, especially with the employment situation the country is in right now.  Wouldn’t you like to NOT have to worry about where your money would come from for a year if you had no income coming in?  If you are retiring, it is good to have 2-3 years of income in cash just in case the market does what it did in 2008 and you will have some time for your longer term investments to try to recover.

Mid Term Savings and Long Term Savings

What things would you save for that might be out as far as 10 years?  How about paying cash for a new car or at least putting down a large down payment so you can pay it off in 2-3 years?  How about a real estate investment that you would like for an income stream from rentals or a lake house to use on weekends?  How old are your children?  Will they be going to college within 10 years?  Wouldn’t it be nice to have a cushion to help with those expenses?  I’m sure you can think of other desires you have for the next 10 years.  For retirees, these investments should include your less volative investments that provide income or future appreciation that you can tap into 5-10 years down the road.  Investments that won’t be needed for 10 years or more can be positioned to generate higher returns but they also typically incur greater risk.  Many people who are retiring soon think they need to get rid of all risk in their investments.  But the bigger risk is inflation.  Ask yourself this question - are you going to USE all your money within the next 10 years?  I didn’t think so.  So think differently about risk and read some good books on the topic.  You can start with titles in my Recommended Reading List on this site.

Saving for Fun

Well this is all well and good, but we did mention fun at the beginning of this post.  I’d like to share a story about my youngest daughter’s savings habits when she was still in elementary school.  She was perusing her savings one day and I stopped to chat with her about how she was doing.  She was a very wise child and said “Mom, I have 3 jars of money.  The first is for fun cheap stuff, like candy.  The second is for things that cost more, like a video game.  And the third jar is for the money I’m saving for something special I might want that is more expensive.”  I thought that was a pretty good plan for an elementary age saver.  She had already decided that some money wasn’t to be touched unless it went towards a specific financial goal.  We eventually put her “more expensive” jar of money into a money market account and she left home with it intact when she went to college.  And 8 years later I would bet she still has most, if not all of it.  That’s the way long term money is supposed to be handled - as if it doesn’t even exist.  And she still had the freedom to spend her short term (candy) and mid term (video game) money because she made a plan.

So make a plan.  Check out some good personal finance blogs (The Simple Dollar) has links on the home page to Blogs I Read), read some good books from the library, and keep coming back here for more insights to help you create wealth and breathe a sigh of calm because you are putting away 3 types of money.  You can afford a fun reward to celebrate all your efforts.  If you need to tackle debt first, read some of Dave Ramsey’s books to get you started.  Create good habits to replace the old bad habits.  Now, go out a buy yourself a little treat because a fun reward doesn’t have to be expensive.

I’m a trend analyst.  Not by formal training, but by nature.  Trends help me try to make sense of the universe.  I really must be a math geek because I am always looking for patterns.  I guess that’s why stock trading appeals to me.  As the DJIA hovers around 11,000, my curiosity peaked and I decided to take a random, or not so random, walk through recent history.  A lot of people follow the S&P, but I like the DOW.  It’s a microcosm that tells us about America.  I use the S&P and Nasdaq to verify what I think I’m seeing.

RECENT HISTORY

So what did my walk tell me?  That being in the market and investing regularly is a good thing.  I’ve mentioned before how the market went sideways through the 1970s but people still made money.  They did it by continuing to invest smartly.  As I get close to retirement I have tempered my usual aggressive self somewhat, but if you still have 20 or 30 years to invest before starting to withdraw assets, you may find my trend analysis interesting.  Even you old boomer farts (like me) might want to follow along.

A SIDEWAYS TREND

We have been in a sideways trend between 10,000 and 11,000 for the past 6 months.  That is the longest sideways run since 2007 when the DJIA moved sideways in a 1000 point range for 9 months.  It will be interesting to see if we break 11,000 and move up or meet resistance for awhile.  After hearing my analysis, you decide what you think will happen.  Starting in April, 1999 the DOW hit 10,000 and didn’t look back until the market bobbles in 2001 and 2002, in effect a 3 year run before a major change occurred.  Then in May, 2002 the market started a slide to around 7500.  Recovery was quick - 10 months of hand wringing until the market started up in March, 2003 and was once again above 10,000 in December, 2003.  People who kept buying (that would be me) were happy and had a nice double digit increase in 2003.  The DOW stayed in a range between 10,000 and 11,000 when it once again started rising in February, 2006.  At that point the market kept going up and up for 20 months until the DJIA was over 14,000 in October, 2007.  It was a lofty year for stocks and real estate alike.  But then things started to change.  After such a heady rise for over 4 years, it was hard to appreciate that the end was near in October, 2007.  The DOW stair stepped it’s way down to 13,000 and dropped to around 11,000.  It was a confusing market.  The average 401k investor couldn’t tell if it was building resistance or support. (Check the recommended reading list if these are foreign terms.)  Hindsight tells us it was definitely resistance.

In August, 2008 the party came to a crashing end with a 3 1/2 month long freefall that caused people to start crying “depression”.  Those who had ignored everything occurring in the economy were blindsided and lost 40-50 percent of their investments.  A 28% drop occurred during those 3 1/2 months with another 16% decrease until the DJIA hit bottom in March, 2009.  With the mortgage debacle that was happening, bonds weren’t sacred either.  The chase for higher bond yields in funds put these investments at risk.  An interesting aside is that market volume started rising above 2 Billion shares in September 2005 and continued to rise until it hovered mostly above 5 Billion shares from August, 2008 until June, 2009.  Volume still is hovering over 4 Billion shares, double the rate in 2005.  Who is buying and who is selling?

THE GLOBAL ECONOMY

So now we’re touching 11,000 on the DOW.  We’ve been above 10,000 since November, 2009.  The real estate market appears to be recovering.  But where are the jobs?  Where will they come from?  The banks are sitting on their impressive returns after TARP money was handed out, but businesses need capital to grow.  Without business growth there is no job growth.  The government doesn’t produce anything so all the “stimulus” activity is just blowing sand until business owners start feeling confident enough to start letting go of the purse strings.  I don’t see that happening in the real estate market yet.  Realtors are conserving cash because they know (those that educate themselves) there is another wave of foreclosures coming that will affect real estate prices until 2013.  Arms are resetting.  One of every 6 mortgages is in default and 1 in 4 mortgages is underwater.  There is phantom inventory sitting in bankers’ portfolios and there are phantom short sales overhanging the market because some delinquent loans haven’t been foreclosed on….yet.  But does that all mean you should pull out of the market and hunker down for the long haul?  Everyone has to check their gut to see how they feel about that.  I’ve pulled back more than I normally do, but I have a short timeframe before I need to tap into my money.

For people with a long view, this market offers buying opportunities that are appealing for both stock based investments and real estate.  We could have a long sideways market.  We could see the market slip again if a lot of bad news hits the presses.  My gut is telling me that we’re not going to see any long sustained increases in the stock market or in real estate prices anytime soon.  Only time will tell me if I’m right.  The DOW is still 22.5% lower than at the height of the market in 2007.  We’ve been over 14,000 before and we’ll probably get there again.  We just don’t know when that will happen.  We not only are affected by what happens in the US but by what happens worldwide.  China owns a lot of treasury bonds.  The EU is having issues with Greece and trying to decide when/if to step in to protect the euro.  The EU is like a mini US now and they have to play nice with each other to hold things together.  It will be interesting to see what financially solid Germany does as things play out.

WHAT SHOULD I DO?

Some people are comfortable being contrarians and taking educated risks to try to take advantages of market opportunities.  Others are more comfortable pulling out, sitting back, and taking a wait and see approach.  Common sense for one person is very different for someone else.  I believe in knowledge.  The more you have, the more you can make educated decisions that feel like common sense.  So my recommendation is to read, listen, talk to people you trust, and educate yourself.  After awhile a pattern will emerge that makes sense to you so you can try to make sense of the universe.

Here is the link to an article on the fbi.gov website giving future landlords and future tenants valuable information about scams to be aware of and includes a list of steps to take to protect yourself.  Since this is a recent press release, it is apparent these scams are still out there.  In some distressed markets, scammers even rent out a vacant home, the tenants move in, and then find out it was all a scam when they are told to leave.  If it sounds too good to be true……..you know the rest.  Landlords should use a reputable service to do a credit check on potential tenants or use a property manager who takes those steps on behalf of the landlord.  It never hurts to hold a check for a 10-14 day period before releasing any of the money so you can make sure it’s good.  Prospective tenants should take the steps outlined in the FBI press release.  Don’t get scammed.

Today is cleaning day - not only my office, but my web presence.  I was looking for old links that no longer work, posts that are irrelevant, and reviewing profiles for dated information.  What I discovered is that in the 5 years this blog has been in existence, a lot of what has been posted still offers valuable information for our readers.  We categorize the posts so you can easily find what you are looking for and to try to keep similar content together.  We try to be consistent about the tags we use so you can locate a post you read 2 years ago and wanted to reread.

So check it out!  There’s some good stuff squirreled away in the various categories.  If you want to help us improve, leave a comment and we’ll consider your thoughts.  We have many new ideas that you’ll see in upcoming months.  And those seminars we have been promising for the past year are getting closer.  You’ll be the first to know when our focus group seminar is scheduled.  There is a lot of information we want to make available and we want it to be current and user friendly.  We hope you will stay tuned.

Here’s where you can find a list of important changes to credit card regulations intended to protect consumers.  Changes Set to Protect Credit-Using Consumers | RISMedia  I don’t know about you, but the fact that you could be a few hours late with your payment and could end up being dinged by “universal default” so that all your card rates go up, is a practice by credit card companies that I have considered very underhanded.  Universal default still exists, so look at the new rules to see how it is applied.

With the new rules, as long as your payment is received by 5pm the day it is due, you are considered to have paid on time.  Plus, if your payment due date falls on a Sunday or holiday, you get an extra day added to your due date.  The other thing I think is an improvement is that the credit card companies have to mail or deliver your bill 3 weeks before it is due and they have to give you a consistent due date.  That will help everyone who uses electronic bill payment services so you can set up an automatic payment and never be late again, which can help raise your credit score.  If you only pay the minimum due, you will still take years to pay off your balance, so make a plan to get those balances down and don’t use the card until you pay off what is owed.  Paying interest is a lost opportunity for being able to buy fun things you want.  Instead you get nothing for your money except a bill every month.  The best plan is to pay off your balance every month.  If you can’t do that, figure out why not.

People under 21 will now have to show proof of financial ability to make their payments or have a co-signer to get a card.  Let’s hope this rule helps a lot less college students and young people get in trouble with credit cards which damages their credit at a young age.  Plus you start out in life behind and never seem to get ahead.  Very sad way to start adulthood.  Financial responsibility goes a long way to helping you have a less stressful life.

There are needs (food, transportation, shelter) and wants (video games, top of the line mobile devices, name brand clothing) in life and wants will never be needs.  Too many people have been using credit cards to buy wants they can’t afford.  Maybe as a country these rules will help us individually get our priorities straight and we can tell Congress to get their spending priorities straight as well so that the next 3 generations aren’t bankrupted.  Not many of us, government included, have a pocket full of blank checks with endless resources to pay off debt.  But that’s another topic.

Happy New Year and Welcome to 2010!  Tear off your rear view mirror and start driving with purpose.  I am very excited about the new year.  I have plans for myself and my business.  Real written plans.  Do you?  So I have my map and I’m going to use it to get to December 31, 2010 and applaud what occurred during the year.  I spent a few minutes reading through some old posts on my blog and I realized that one theme came through - be positive and believe in yourself.  Yes, that can sound trite, but if you don’t have a vision of where you will be 12 months from now, you will be in the same place or worse.  I plan to be in a better place even though I’m pretty happy with where I’m at now.  Success builds on success.  Let’s all have a plan for success in 2010.  Join me.  I’ll be waiting at the finish line next December with a glass of champagne in my hand.  How about you?  If you need a little motivation, just come back here and start reading.  We’ll keep the positive vibes coming for you.

Here’s a neat tool to help you get a REAL person when you call companies trying to avoid talking to you.  Now instead of just repeatedly hitting zero like I usually do, you’ll know what to do.  After all, it costs money to provide customer service and heaven forbid companies putting that in their operating budget.  I found one on the list that I need!  I’m sure you will too.  Click here.

I’m almost half way through a book that my sister told me about.  Outliers, The Story of Success by Malcolm Gladwell.  He also wrote Blink and The Tipping Point.  Outliers gives a different perspective on how people become extremely successful.  It’s a fascinating read.  How did the best athletes get where they are today?  How about heavyweights in the business world?  What is the meaning of 10,000 hours?  What does any of this have to do with you?  Read Outliers to learn more.  If you could develop mastery in one area, what would you choose?

Want more good books to read?  Check out our Recommended Reading List.

I’ve been an investor for a long time and I’m interested in trends in the market, because we all know investing in the stock market (or real estate market) is not a short term endeavor if you want to truly be successful.  I love the charts on Yahoo and with the DJIA rising in recent weeks I wondered what the long term chart looked like for the DJIA in January of each year over the past 20 years.  I kept buying shares during the 2000-2002 downturn and made a very nice double digit return in 2003.  Is the current chart so very different?  Looking at the chart for the past 6 months is scary but here’s what I found out when I took a longer view.

At the beginning of 2003 after the previous downturn, the DJIA was at 8054.  In January 2009, the DJIA was at 8001.  Let’s look at the long term trend from 01/1989 to 01/2009:   01/89 2342, 01/90 2590, 01/91 2736, 01/92 3226, 01/93 3310, 01/94 3978, 01/95 3844, 01/96 5395, 01/97 6813, 01/98 7908, 01/99 9358, 01/00 10940, 01/01 10887, 01/02 9920, 01/03 8054, 01/04 10488, 01/05 10490, 01/06 10865, 01/07 12622, 01/08 12650, 01/09 8001.  Would you have invested over the past 20 years knowing what has happened in the past 6 months?  I sure would have.  I would have put in even more than I did!  The point a lot of people miss is that the real value of long term investing is not how rapidly the indexes rise, but how many shares you are accumulating along the way.  If you sell out near the bottom or you don’t continue to invest when the market is down you lose a lot of ground.  Buy low, sell high means buy lots more shares at low prices and reap the rewards when prices go up and you get to cash in to have money to live or achieve goals you’ve set.

Just thought you’d like to know.   If you had continued to invest and have more now than 20 years ago, do you think you’d have money to invest in historically low priced real estate too?  Something to think about.  Fear and greed drive short term movements in the markets.  A long term vision helps put it all in perspective.  If you want to know how to do it, there are a lot of good books on library shelves that can help you.  If you need help picking and sticking with an investment allocation, meet with a good experienced financial advisor to get you going.