I won’t lie… I just wanted an excuse to post this video. That street dance off around 3:30 is pretty sweet. So let me try and make some point out of this post… let’s see…
Long Days, Tough Times
Do you ever feel like this when you wake up? Right when the alarm goes off you roll over, look at the time, and a mood of dissatisfaction just encapsulates your bedroom. You realize its time again for work. Your 1 day weekend just ended, and you have quite a long week ahead of you. Each day you feel like you are just going through the motions only to feel like you are going backwards. And then BAM. You just wind up finding the straw that broke the camel’s back. You logged into your retirement accounts. You go tab by tab thinking to yourself that it can’t be as bad as it seems. FINALLY the page loads because your Comcast connection has been messing up recently (and of course when you call they blame it on peak times… its 5am!). You frantically search the page in a zig zag fashion and then your eyes lock on… Yearly Return: -31.9%? Ack. Well now what?
The Day Just Got Tougher
This is a pretty easy way to ruin the day. It ruined mine the first few times I saw results like that. And you have read the advice that market turbulence is normal and you should expect it… the markets will recover! You read those articles and you surely understand them, you have been investing for a while. However, you just can’t shake it. You decide to lower your 401(k) investment from 10% to 8%. You would be better off with the money in your pocket. Your Roth IRA is going down, too, though, so you don’t max that out either. Again, that money would be better in your bank account earning 2% interest than losing 15% more this year! I won’t even mention the benefits of dollar cost averaging… surely you know the benefits of that, too.
What’s the Problem?
So what is the problem here? Whether we like our jobs or not… it doesn’t matter. I was being facetious. But we all know the problem we are facing and we all know the reasons we should not be scared… markets recover, dollar cost averaging, power of compounding interest, time horizon, etc. But no matter what, we all have a certain risk averseness to ourselves that is hard to overcome whether it be by logic or by force. I consider myself pretty risk averse but that has not stopped me from building up a pretty sizable emergency fund. I am risk averse, but I am not naive. In tough times, out comes sensibility!
I think a large part of the problem is that a lot of people have started to just re-invest (and you could argue some people have begun speculating wildly) without any thought going into the matter. What we could all benefit from is a plan. This plan should come with a few questions, especially for an economic climate of this magnitude…
1) How risk averse am I really? Can you not stomach the fact that you have lost so much money so quickly, whether its realized or unrealized? Maybe a 90% stock portfolio is not the best option.
2) What is the time horizon in which I want to re-build my portfolio?
3) How will I get there? Use specific, measurable goals.
A Good Resource
Well, I found a pretty cool tool on the New York Times called “Calculate Your Financial Comeback” and think that if you feed it the right information it will aid in finding out what a reasonable time horizon is to reach your past peak investment levels. Depending on what you have judged your risk at… play with the expected rate of return slider to see the horizon change. Remember, risk equals reward. If this current crisis hasn’t showed that… that lesson will never be swallowed.
Money NING has posted a great article on what lies ahead of us: The Doofus Decade. People will think you are a doofus for investing.
I am interested in how long this economic slip has set all of you back and what kind of plans you have to recover. As for myself I did not have that much invested in risky items. I guess I was lucky… but I had my money going into an emergency fund to cover myself for a year (my company was going through layoffs and I wanted to be safe) and into my 401k and Roth IRA. However I did not fund it all up front, I dollar cost averaged in so my losses have not been to catastrophic.
I'm MLR. After graduating from college debt free, I decided to write a blog encouraging people to adapt responsible and sensible personal finance rules.
February 26th, 2009 at 8:22 pm |
Well, besides losing my job, my investments have taken a hit. However, my biggest upset, investment wise, is that the lack of a job is keeping me from putting more money into my investments. I’ve even been considering stopping my automatic investments so that I can have more money for expenses and bills.
My recovery plan has to begin with getting another job. (Or becoming such a popular blogger that I can make a decent living from that; but I’m going to call that ‘Plan B’ for now.) Once I’m getting money coming in again, I can rebuild my emergency fund, increase my investments, and start saving for a house down payment. That’s my plan, anyway.
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February 27th, 2009 at 3:43 pm |
I would not stop the automatic investments. Key word being stop. If you need to whittle them down to just like $30-50 that is a much better idea. Do they allow smaller auto investments like that?
Never like to see people break GOOD habits!
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February 28th, 2009 at 1:34 pm |
Perhaps I should have worded that differently… Currently, I’m putting $100 a month into my Roth IRA with Vanguard and $200 a month into my non-retirement account with Sharebuilder (in addition to paying a $12 monthly fee for their automatic investment service). I was thinking about shutting down the latter and cutting down $212 in expenses each month, not the former (so, I would still be investing in my Roth).
In fact, if I do go this path, I’d likely increase my Vanguard contributions by at least $50 or so a month, so I’m still putting in about ten percent of the money I get from part-time work and unemployment. So, still investing, just not as much, and not in the same places.
(As an aside: In case you’re wondering why I’m not putting more money into my Roth, it’s because I’m hoping to open up another mutual fund in order to complete my desired asset allocation. Since Vanguard requires a $3000 initial deposit to open a new mutual fund, I need to add less than that amount to my existing accounts in order to open this new account. Hence, my current contribution sizes.)
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