Return to the Household Finances Forum | Post a Follow-Up

 o
Current Market downturn

Posted by valuable1 (My Page) on
Thu, Aug 16, 07 at 9:54

My 401K is down 10k+ and will sink much more before the market bottoms out as result of the credit debacle.
There is no safe haven option in my 401K. Does any one else see this as huge problem with the 401 K scheme that has been foisted upon so many?


Follow-Up Postings:

 o
RE: Current Market downturn

I don't consider 401K's as a "scheme". (DH's 401K is down over 30k right now). I've seen friends (the last time the market tanked) take their entire 401K and put it all into an interest-only fund. Several years later, they regretted it.

It's not fun to watch your hard earned savings go down, but back up a bit and try to take a long term view.


 o
RE: Current Market downturn

"Does any one else see this as huge problem with the 401 K scheme that has been foisted upon so many?"

If you will be thinking THAT way, maybe a 401k is too much of a gamble for you....

I don't see it as a 'scheme' at all!


 o
RE: Current Market downturn

A 401(k) is a way to save money for your retirement over your entire career. Most people's careers last more than 30 years, many more than 40.

30 years ago, the Dow Jones Industrial Index was about 875. From that perspective, a few percent up or down doesn't matter much.


 o
RE: Current Market downturn

There is no safe haven option in my 401K

Are you sure, or are you just thinking of a safe haven as a money market type account. I 'think' I heard/read where bond funds do 'better' when the overall market is dropping. Please don't quote me on that.

I've had friends who were 'knowledgable' about such things shift their monies around during tumultuous times and did well. I never knew enough about it all to do that, so I just 'let it ride' and things ended up just fine.

Unless you need the money now or in the near future, it will go up and down, so if the 'downs' bother you a lot, you might want to consider something else.

I look at it this way...I only lost it (money)on paper, and it 'will' be back as it has historically.

Sue


 o
RE: Current Market downturn

Perhaps this is a time when you should take a hard look at your risk tolerance. 401K's, 403(b)'s, etc. are hardly "schemes", but like any other investment are subject to ups and downs. I suppose if that drives you crazy, consider the pitfalls of stopping your contributions and trying to do better on your own.

Schedule an appointment with your plan administrator and find out what latitude within your program you have to do some investment shuffling. I rode out the dot.com crash virtually unscathed by moving to a fixed rate of return. I'd gotten good advice and saw that coming and losing big wasn't a risk I was willing to take; especially since a few years down the road I was planning on taking first opportunity retirement - preserving what had accrued to that point was primary.

We haven't seen the worst of this yet since the bottoming of the lending/mortgage crisis is yet to come. But there isn't any magic bullet for guaranteed safe investing; no generic one plan fits all. Since retiring, I left my tax deferred account in a fixed rate of return since, as I got older, my risk tolerance got lower and it was just a portion of my holdings anyway. My portfolio also includes stocks (I'm a buy and hold for the long haul), treasuries, municipal bonds... Diversification is one key to having an offsetting edge.


 o
RE: Current Market downturn

I don't see it as a problem since I can put my 401K in something as risky or "safe" as I want. Since retirement is at least 15 years away mine is invested aggressively and higher risk. I haven't even looked at it and am not having alot of anxiety about it. You must be retired or much closer to it than I am.


 o
RE: Current Market downturn

Oh yeah... the market's ups and downs could make me crazy, IF I allowed it to!

I still have 20+ years of work ahead of me. So the belly flop we're now witnessing is something I can "handle", even though it makes me sweat if I think about it too long and too hard.

I've watched this happen before and I've watched the market recover nicely. I remind myself that I still own the same quantity of shares to day that I owned the day before the plummet. The price per share has gone down, but when the market recovers I still have the same number of shares. The price per share has fallen but not the quantity I own. When the market recovers, I'll be OK.

I have confidence in the funds I'm invested in; I understand them and believe they'll return nicely.

Have a glass of wine and relax.


 o
RE: Current Market downturn

At this point, I'm unimpressed by the market downturn.

I see it as a time to go bargain hunting...or at least, not a bad time to buy mutual funds.

In the past, I have resisted this because the experts would always advise, "whoa! This market could go a LOT lower!". Well, maybe it did and usually it did only a little... but it always rewarded those who entered the market when everyone was freaking out.. handsomely. There are probably exceptions to this, but I'm tired of missing out on these opportunities. Why not take a risk on occasion?


 o
RE: Current Market downturn

There are bargains to be had out there and there will be plenty of bargain hunters; all it'll take is for some good news from one sector or another (like consumer spending staying steady or a major corporation beating their projected earnings) to stem the sell-offs. Can always expect a few bumps in the road here and there, but the DOW losing 10% of its value is considered a correction anyway.

If I had my eye on something, I wouldn't be afraid to jump in now. Maybe not Berkshire Hathaway at $113,750.00 a share, but, if you're a little timid, a good "widows and orphans" stock that pays a dividend, plods along, runs up, sometimes splits, sometimes spins off a holding and gives holders 1 for 1 or 2 for 1 in the spin-off, the spin off gets taken private, and the shareholders get bought out... For a place to park discretionary funds, the market is as good as or better than many things money can be thrown at.


 o
RE: Current Market downturn

"I remind myself that I still own the same quantity of shares to day that I owned the day before the plummet...The price per share has fallen but not the quantity I own. When the market recovers, I'll be OK."

This is the way I look at it too, Chelone.


 o
RE: Current Market downturn

Historically, this is a very small percentage drop after a big run-up.

1962 - 1966......................75% run-up.
Feb. 10, 1966 - Oct. 7, 1966.....22% drop.

1984 - 1987.....................127% run-up.
Aug. 25, 1987 - Oct. 19, 1987....33% drop.

1990 - 1997.....................232% run-up.
Oct. 8, 1997 - Oct. 28, 1997.....11% drop.

2003 - 2007......................94% run-up.
July 20, 2007 - Aug. 16, 2007.....8% drop.

Yesterday greed over-ran fear as "bargains" were sought. We'll see.


 o
RE: Current Market downturn

Thank you for posting those stats, Chisue. I've seen similar stats and agree the media hype these days is frightening people unnecessarily. It's hard to remind ourselves to take the long term look! My recent issue of Smartmoney magazine included some interesting stats on retirement planning, trying to get people to realize they need assume they will live to at least age 90.

You and I don't always see eye to eye on issues, but your thoughtful contributions are always appreciated.


 o
RE: Current Market downturn

jkom51 -- Thanks for the kind words. BTW, the Chicago Tribune had an editorial on "our" bone of contention over health care premiums today.


 o
RE: Current Market downturn

I have some money available to invest ... a few days ago, it was about 8% of my portfolio, but it's probably closer to 10%, now. I'm not big on figuring out the level of my assets on a daily basis. But I'm sitting on the cash, at the moment.

I may choose to use part of it to buy some quality stock, soon, but I think that it's too early, yet.

And I expect that I'll buy in stages, as no one can tell when the bottom of the market takes place.

I prefer to buy in stages, over what (we hope) turns out to have been the bottom of the market.

Plus, I have a fully-secured line of credit, and will probably inquire at the bank in a day or so what rate they'll charge, should I choose to use it in the near future. The rate they'd want was 6.25%, a couple of months ago.

I'm getting up near 80 years old, and I'm carrying about 80% of my assets in equities, most of them individual stocks. I have about 1/3 of the assets in mutual funds, most of them equity-based, but I haven't bought any in nearly 20 years ... I don't like their annual fees, especially since few of them outperform the market, on an ongoing basis.

Learn how money works ... an interesting hobby - that pays well.

ole joyful


 o
RE: Current Market downturn

BTW, just to put this in some perspective:

Between 2000 and 2002 our portfolio sank by 27%. Yup, over a quarter of it...gone.

In 18 months, the portfolio came back to its pre-2000 levels. It's doubled since then, so even the recent "downblip" - I refuse to call it a downturn, such a minor wiggle doesn't deserve it - still leaves us ahead overall.

It's not like we plan to spend the money all at once. It's intended to last us another 25 years, minimum. Just keep reminding yourself, this is LONG TERM money.


 o
RE: Current Market downturn

Re: Investing for retirement and "long term". Remember to have three years savings on hand to see you through any nasty "blips" that the market may encounter immediately before or after you retire. Then, with luck, you won't have to sell in a down market to be able to eat.


 o
RE: Current Market downturn

There's a big difference between a paycheque and a pension cheque.

When you're earning a paycheque ... you have to be physically, mentally and emotionally in good enough shape that you can show up for work and do the job appropriately, or the cheque evaporates.

With my pension cheque, all that I need do to qualify is ... stay topside the grass! I can be ill near to death, or travelling in Tinbuktu or Vancouver, playing golf or whatever ... that dependable cheque just keeps arriving.

And I'm only minimally concerned about the viability of the pension plans, now or in future.

Since I live rather frugally, by choice, I live on less than the pension income.

Plus I have a tax-deferred retirement plan that requires me to take out a certain amount annually, at annually increasing percentage of the total fund till it gets to 20% at age 90, then stays at that level. Currently it pays about 7% of my annual income.

Even if you are near retirement age now, I suggest that you not be too upset about carrying a substantial portion of your retirement fund in high-quality equity investments, whose value may fluctuate on an ongoing basis, but which has traditionally done well over a period of years.

When I was 70, I thought that I should plan to fund myself to age 100, which was 6 blocks of 5 years each.

Since the amount of the first block that I spent from age 70 to age 75 would not be there to earn in later years, I felt that it would be unwise to spend a large portion of it in that first 5-year period.

Moreover, while my pensions are partially indexed, we have experienced inflationary pressures in every one of the last 65 years, and I expected that it would continue.

That led me to feel that I didn't want to spend more than that first block of asset in not only that first block of 5 years, but before the end of the secod 5-year block, as well.

Which meant that I planned to have 5 of those 6 5-year blocks of asset, about 83% of them, intact after 10 years.

And I feel comfortable with having a substantial portion of my asset that I don't plan to use within the next ten years or so in high quality equities.

Now, as I near age 80, I spend more or less the amount of my pension income annually, but investment income means that I can re-invest a substantial amount annually.
I'm not sure what my asset as about 10 years ago, but it's quite a lot higher now, much more than had I invested it at low rates of interest.

So if my asset level declines even up to 20% or so, I'll not cry, for I expect that the quality stocks, that pay a good dividend (tax-advantaged, in Canada) will see their asset values rise, after the drop.

Templeton Growth Fund dropped 2 years in a row, in '74 and '75. I forget the percentage, but think that it was about 20% ... but in '76 it grew by 38%, and I think an above-average percentage in '77, as well.

Be careful of percentage levels, though - do the figuring yourself.

If your stock was worth $100., then dropped by 25%, and after that increased by 25% ... you'd be back where you started, right?

Wrong!

If your $100. drops by 25%, the resulting figure is $75. Then if it grows by 25%, 25% of the new value of $75 is ... $18.75, for a new total amount of $93.75.

The $25. that your fund dropped is 1/3 of the new amount of $75. ... so your new level of asset must grow by 33.33% for the fund to achieve its earlier level.

If your asset value drops by 25%, then gains 33.33% ... you're right back where you started.

So ... be careful of those percentage rates that many people (especially salespersons) throw around.

Learn how money works ... it's an interesting hobby, that pays well.

ole joyful


 o
RE: Current Market downturn

I'm starting to see more comments from investment managers, etc. that scoff at the word "downturn". One fund manager quoted the the Chicago Tribune today said that the current mess is as though you'd reached Chapter Two of a 25-Chapter book.


 o
RE: Current Market downturn

David Wessel's column in today's WSJ is an enlightening look at what the Fed can and cannot accomplish. As he points out, the problem is NOT insufficient funds. Banks are currently flush with cash. The problem is what he calls "lubrication" - short term lending. People are scared - hey, bankers read the headlines too. The instinct to bad news is to hunker down and not do anything.

As I've mentioned before, IMHO money's only worthless when it sits there. It needs to circulate for it to be worth anything at all. Wessel points out that today's economic engine works very differently than when the Fed Reserve was created in 1913. The very laws that strengthened banks by insisting they have sufficient capital reserves to back up their loans, have created a world in which loan and mortgage debts are packaged into securities and sold all over the world to investors.

The Fed doesn't have any way to change how these securities are valued. Unlike the savings & loan debacle of the '80's, which stuck the taxpayers for the bill, these securities aren't guaranteed by the government so the uncertainty is, who exactly is left holding the bag? Another reason, then, for the financial industry to hunker down and not make loans except for very, very sure ones.

To quote Wessel's column, "This system has never been stress-tested -- until now," says economist Richard Clarida of Columbia University.

It always reminds me of that Irish curse: "May you live in interesting times!"

And so we do.


 o
RE: Current Market downturn

It looks like there was no supervision of mortgage brokers or rankings of mortgages. The brokers wanted to make all the mortgages they could. The Moody's et al wanted to get paid for their rankings -- and who'd employ them to do the rankings if they gave low marks?

Hey! I thought that was a Chinese curse!


 o
RE: Current Market downturn

When we applied for the home equity loan to build our garage we were assured our loan would not be "sold". I expressed surprise at such a guarantee and was told that the bank is not in the practice of "selling" mortgages they sell, nor do they sell home equity loans. We were required to provide proof of ownership to our home and proof of income. We jumped through all the "hoops" I'd expect ANY lender would expect. And we were OK with it!

I hadn't thought about that until reading the last week's posts. We do business with a locally owned and managed bank that has turned down several buy out offers.

Do you think that makes a difference nowadays?


 o
RE: Current Market downturn

O.K. - So now what does every one think? Have you logged on to your 401K site and looked for safe place to move your dwindling balance. i.e non stock related?


 o
RE: Current Market downturn

We haven't changed anything. When hubby retired in Dec, we made sure that we had enough liquid assets to carry us for two years so that we would not have to sell during a downturn.

We're still focused on 10, 15, 20 and hopefully 30 years down the road. I expect this recession to last 2-3 years.

If I were younger and still working, I'd be contributing the max to my 401K.


 o
RE: Current Market downturn

Zone8 - I'm with you. History proves that over that 10,15, 20 year time horizon, the stock market pretty consistently has positive returns. And history also proves that the average guy is clueless when it comes to timing the market.

Since the Dow has dropped from about 14,200 to 11,900 or so yesterday, I think you potential sellers might have missed the boat.

I took a chunk from my money market account yesterday (which I just received at the beginning of this month) and bought stocks. The current market correction is good enough for me to be buying, not selling. And due to a weird set of one time only personal financial circumstances, I'll have maxed out the contributions to my 401k for this year by mid-April. I'm perfectly content to invest this year's contribution all between Jan and April - in the big picture, these last couple of months are a fine time for me to be buying...considering that I won't be "retiring" for another 12-13 years.

Good luck investing, folks!


 o
RE: Current Market downturn

Good column today from Brett Arends, WSJournal columnist (major points excerpted below):

Opportunity in Credit Crisis
March 19, 2008 WSJournal
Brett Arends, ROI columnist

This must be about the 10th full-scale financial panic I've covered since the mid-1990s. Could anyone ever forget Long-Term Capital Management? How about WorldCom, or the panic after 9/11? And what about the SARS crisis in Asia back in 2003? There have been plenty more. And during each one, serious and intelligent financial figures in London, Boston or New York assured me that the economic world might collapse altogether.

Maybe it will some day. But you could get old waiting.

Meanwhile, crisis means opportunity. And some people are going to get rich, and retire early, thanks to the moves they make today.

Here are 10 things to think about if you are trying to manage your investments during these turbulent times.

1. Invest during a panic. Especially when it hits the front pages. Somehow, the system almost always seems to recover.

2. Don't speculate. It takes a 100% profit to recover from a 50% loss.

3. Don't make too many bets. If you don't have a strong view on financials or commodities, you don't have to take a position. You can be diversified without owning every asset class.

4. Be very wary of any boom. Price matters.

5. Don't put too much weight on expert financial analysis. Economists, goes the joke, have successfully predicted seven of the last three recessions.

6. You don't need to pick individual stocks. Usually most investment returns come from picking the right sectors or types of assets, not from the individual stocks.

7. Invest in stages. I can almost guarantee that if you wait for the perfect moment to make that big bet on the markets, you'll either be way too soon, or you'll miss it altogether.

8. Only invest for the long-term. That means five years or more. Ignore short-term noise.

9. Consider picking a really good active fund manager to make your bets for you. They do exist, although they are rare. Look for mutual funds where the manager has a terrific long term record -- ideally 10 years or more. And where they can invest in different markets, and hold cash. That's really the only way they can outperform over time.

10. Finally, if you're simply too afraid of taking any risks at all -- try thinking about what inflation is going to do to you if you sit in cash on the sidelines. There are, literally, no risk-free places to hold money.


 o
RE: Current Market downturn

What do I think?

I think that while yes, the total value of my 401K has dropped, I'm not even close to cutting into the money I've earned.

In other words, what I'm losing is all interest/earnings, NOT principal.

I also think that while the per share price of the mutual funds that are available to me in my 401K are dropping (hence the drop in total portfolio value), what that REALLY means is that I'm dollar cost averaging like crazy.

For example... in November (I think it was November), my Dodge & Cox fund had a per share purchase price of roughly $160 a share.

Today it's about $122 a share.

I'm buying more shares for the same amount of money.

I also think that with close to 30 years until retirement age occasional downturns in the market really aren't that big a deal.

A 401K should be viewed as a long-term investment strategy.

Now, if you're worried about preserving principal, then your contributions should probably be funneled into bond or money market funds and not mutual funds.

But that's a double-edged sword.

Sure you'll probably earn a few percentage points when the stock-based mutual fund market is going down.

But, you'll not earn a lot more than that when the stock-based mutual fund market is having a banner year.

Over the past 10 years there have been several times when my entire stock-based mutual fund portfolio has gained 20% or more, with several gaining anywhere between 35 and 50% for the year.

During those same periods of high returns the bond and money market options have been hard pressed to return an average of 5%, or barely above the inflation rate.


 o
RE: Current Market downturn

I still have years of work ahead of me. I'm naturally conservative when it comes to money, and I've done my share of squirming in recent weeks. But, I'm taking the long view, too. Everything I've read and heard on the radio speaks to emotion dictating the market swings in concert with the the financial news.

I can't control the finances of large investment banks. But I'm good at controlling my own fixed expenses and living very comfortably below my means. I can control my emotions (within reason).

The last thing you want to do when a barking dog charges you with his hackles raised is run (even though you may want to). The safest position is one that is stock still, and never look the animal in the eyes. Conquer your fear and patiently wait out the outburst.

GULP.


 o
RE: Current Market downturn

I spoke above of having investable funds on hand. I have about 5% of my assets thus available.

I bought some low-priced, speculative stock late last year - not a good idea in a declining market, for they usually get hammered more than usual at such times.

I bought some more of Canada's largest telecom company (that also owns our major business newspaper and a TV network) ... that there were plans in the works to privatize, at a substantial premium price, that was jeopardized by the U.S. mortgage debacle, and bondholders suing, fearing that, with the major increase in debt, they'd lose seriously, which suit was just turned down, so likely the project will go forward, though possibly at lower than the original price.

I bought a CanAdian mining and processing company, at the beginning of this year.

The speculAtive stock has gone down, the phone stock recent purchase is down some, but I've made about 1/3 on the mining company (it was up close to 1/2, a couple of months ago).

I haven't bought anything since early Jan, but am considering a uranium and natural gas producer that has good prospects, and another junior mining company.

After that, I'll probably wait till fall ...

... remember the long-term dictum: "Sell in May ... and go away"?

I haven't sold stock in I don't remember how long - I've been forced out of several, that were sold foreign or otherwise privatized, or taken over by a company that didn't offer to exchange shares, etc.

It's comforting to live on less than one's pension income ... and that pension isn't nearly as risky as paycheques for work, for all that I need do to qualify is stay alive and breathing. That's close to being a guaranteed income ... and for the rest of one's life. Which leads me to feel that I can play some games with other aspects of my financial system.

If the pensions later shrink, or even die entirely ... I can survive for quite a long time ... unless hyper-inflation appears upon the scene: quite improbable, in my judgement. But if it does, I think that owning assets will work better than having one's money mainly in non-expandable dollars.

Have you read my thread on this forum (I think), "Which ordinary investor gains from inflation ... and who loses?"?

Of course, since I'm nearing age 80, though I'm enjoying good health, my candle is shorter than most of you expect yours to be.

And I still feel fairly comfortable carrying about 80% of my assets in fairly well diversified equity-based situations.

ole joyful


 o
RE: Current Market downturn

This thread was started about 10 months ago. My suggestions that it was a good time to go bargain hunting wasn't such a grand idea if your time horizon was short!

It is interesting that analysts were saying that the market was fairly valued with a good number of bargains.

So what are they saying now? I mean, the S&P was at around 1500 at that time, and now it is down around the 1200's. Is it no longer a bargain?... even though it's cheaper???

Unless folks think it's the end of the world, it's hard to imagine why these aren't the days to invest new money.

Of course, our emotions make this a thing that is easier to say than *do* !

For myself, I have increased my retirement contributions. It's easy to stomach the risks of retirement money... retirement seems so far off and abstract.


 o
RE: Current Market downturn

Just a few reasons of the reasons why I will be keeping my powder 'dry' until this all blows over.

1. Washington's distortions of its most vital economic data ...

2. Wall Street's deceptive evaluations of most of your investments, and ...

3. The outright lies that officials of both Washington and Wall Street tell you on a daily basis to cover their tracks or protect their turf.

* High-ranking government officials in the 1970s who swore the S&Ls were safe, even as thousands of thrifts were failing all around them.

* FDIC and Federal Reserve officials in the 1980s who vehemently denied the threat to commercial banks, even as the bank failure rate surged to the highest since the Great Depression.

* State insurance regulators in the 1990s who swore to the safety of annuities and life insurance policies, even as six million policyholders were being trapped in failed companies.

* Major Wall Street firms of the early 2000s that consistently affirmed "hold" and "buy" ratings for the shares of hundreds of companies that were going bankrupt. (For our detailed study documenting these extreme deceptions, see our white paper, Crisis of Confidence on Wall Street.)

* Auditing firms like Arthur Andersen, KPMG, and Deloitte and Touche that facilitated or even encouraged accounting distortions and cover-ups. (For the details, see our white paper submitted to the U.S. Senate.)

Today, the names and places may have changed. But the systemic deceptions have not.

A link that might be useful:

moneyandmarkets.com/Issues.aspx?Sell-Hedge


 o
RE: Shoddy accounting standards for subprime players

Does anyone else wonder why these banks were EVER allowed to keep ANY of their loans on off-balance sheet vehicles?


Wall Street girds for battle on accounting rules
July 02, 2008

NEW YORK/WASHINGTON (Reuters)�"In the middle of a credit crisis that only seems to get worse, Wall Street is mustering its lobbying clout to delay tougher accounting rules that would force banks to add $5 trillion to their balance sheets.

For years, accounting standards allowed U.S. banks to keep certain loans, such as those linked to risky subprime mortgages, in off-balance sheet vehicles. But members of the Financial Accounting Standards Board (FASB), which sets U.S. accounting rules, have become convinced that approach hid the true risks banks faced from these vehicles, and that standards must be fundamentally altered.

Under FASB's current thinking, analysts estimate financial institutions could be forced to book $5 trillion, which would most likely include troubled loans.

That would skew capital ratios, force banks to stash away cash to offset their risks, and hit their liquidity at the worst possible time.

"These drastic measures are being rushed and could single-handedly erase the efforts of policymakers to provide stability and restore liquidity to our markets," said Brendan Reilly, senior vice president with the Commercial Mortgage Securities Assn.

"Any changes must be delayed until all options and consequences are carefully examined," he said.

However, under direction of the Securities and Exchange Commission, FASB must revamp the accounting standard, known as FAS 140, by 2009. It could release a proposal on the new rule in the next few months.


 o
RE: Current Market downturn

I'm dealing with the downturn by not opening my 401k statements. I won't be using that money for 20 years, and the story will probably be completely different by then. Why make myself miserable now?

Although the last time I peeked, my international fund was doing quite well. Diversification works, I guess.


 o
RE: Current Market downturn

Greetings pipersville Carol,

You ignore paying attention to your assets when times are less than ideal?

Who cares as much about your assets as you?

No one ...except some folks who'd like to transfer some of them from your pocket into his/hers.

As for not looking at your investment accounts ...

... do you walk down the street blindfolded? Drive your car that way?

Keep your eyes open - learn lessons for next time. Knowledge is power. Learn something more each day.

With one exception: unless you expect to die within the next year or so. Even then ... you need to plan for that, as well.

Many successful peoople say that they learned more from their mistakes than from their successes - but they had to examine the issue to get the message.

ole joyful


 o
RE: Current Market downturn

Actually, Joyful, if Carol doesn't have the strong stomach needed to be an active investor, she is BETTER OFF not fooling around with her portfolio, which she says is diversified, than to have the knee-jerk reactions many amateur investors do (which is run for the hills, find a hole and pull it in after them, when times are a little tough, like now).

Carol, do remember to re-balance your portfolio every couple of years, to keep your allocation percentages in line. Diversification reduces risk, and it's better to forfeit some returns and get out a bit early, rather than riding the train too long.

It is always better to know your limits and work within them. Maybe you won't get spectacular results, but over time, slow and steady can be just as good as fast and furious - and sometimes, even better.

An interesting article in this month's Forbes mentioned that equity fund managers were feeling frustrated because they felt there were some good buys in stocks, but investors yanking their money out to flee into "safer" investments meant they didn't have the liquidity to buy.


 o
RE: Current Market downturn

The most recent analysis I received from my financial advisor said that from the 1st of January 2000ad my return has been 9.38% per year. The year by year numbers are all over the place.
At this point in my life, approaching retirement, I am more interested in the income my portfolio can generate for me rather than the nominal sum I would receive if I sold all my assets.
As I am 61 years old I suspect that the boomer generation is likely to be in much the same boat and will be seeking ways of generating a steady income for their years of retirement.


 o
RE: Current Market downturn

jkom51-"Actually, Joyful, if Carol doesn't have the strong stomach needed to be an active investor, she is BETTER OFF not fooling around with her portfolio, which she says is diversified, than to have the knee-jerk reactions many amateur investors do (which is run for the hills, find a hole and pull it in after them, when times are a little tough, like now). An interesting article in this month's Forbes mentioned that equity fund managers were feeling frustrated because they felt there were some good buys in stocks, but investors yanking their money out to flee into "safer" investments meant they didn't have the liquidity to buy."

I doubt that the folks who have bailed out of Bear Stearns, Citi, Wachovia, etc, etc, are kicking themselves for 'running to the hills' and not trusting the system to keep their money safe until they are ready to retire. Even Warren Buffet is keeping a lot of cash handy and he is anything but an 'amateur investor'.

As for all those poor 'frustrated equity fund managers', why wouldn't they be frustrated? How do they make money when people aren't putting their money in the market?

Carol has reason to be concerned about her pension. The rules have changed and even the 'safest' investments are being questioned. A record amount of money has been lost in under the table trading and we still don't know where the bottom is going to end up.

It will be interesting to see where things stand at the end of the year.

Pension plans suffer huge losses
Report says weak markets, credit crunch have drained $280 billion from plans of largest U.S. companies
By Lara Moscrip, CNNMoney.com contributing writer
July 8, 2008

NEW YORK (CNNMoney.com) -- Falling stock markets around the globe and the credit crunch are putting the pension funds of some of the largest U.S. companies into deeper financial holes, according to a report released Monday.

Since the credit crunch hit last fall, pension plans funded by S&P 1500 companies have lost about $280 billion in assets, according to an actuary at Mercer, a human resources consulting firm.

On paper, the losses from last October tally $160 billion. However, according to Mercer actuary Adrian Hartshorn, the asset losses are closer to $280 billion when pension plan assets and liabilities are considered together. The assets, which totaled roughly $1.7 trillion at the end of October 2007, fell by 17%, leaving about $1.4 trillion in assets at the end of June.

Companies should be concerned, he said, because - assuming no change in the market - a typical U.S. company can expect their pension expenses to increase between 20% and 30% in 2009. That's due to the higher cost of servicing the pension plan's debt and the smaller return from the plan's assets.

"I think it's important for corporations to be aware of what's going on in their pension plans, as corporations would be concerned when any part of its business is performing badly," Hartshorn said.

According to the report, the total losses on pension assets and liabilities from the last day of 2007 through the end ofJune has grown to more than $80 billion.

Part of the loss has been reflected in companies' current financial statements, but many losses incurred since the end of 2007 have yet to hit company balance sheets.

The affected pension plans are qualified and non-qualified plans.

Links that might be useful:
money.cnn.com/2008/07/07/pf/retirement/pension_losses/index.htm

Fat pensions spell doom for many cities
money.cnn.com/2008/06/02/pf/retirement/vallejo.moneymag/


 o
RE: Current Market downturn

>>Even Warren Buffet is keeping a lot of cash handy and he is anything but an 'amateur investor'. <<

WB is holding a lot of cash on hand so he can buy companies, or start them - which he has with increasing frequency in the last few months. IOW, he is seeing opportunities in the current marketplace to take advantage of. These opportunities are not only in stock shares, but in entire companies. He is not quite in the same situation as a mutual fund manager - WB can get a globally funded multi-bank line of credit faster than you can snap your fingers, to do any company deal he wants executed. He leverages his cash shrewdly, as any multi-billionaire would.

No one who has ever studied this man and his investing philosophy would ever believe WB treats cash as anything other than another market sector investment to be used when the time is right. Like any good money manager, he aims at liquidating near the top of the market and buying near the bottom; not the other way around. He has lots of cash precisely because he is NOT liquidating now, in a bear market. He built that cash position over time, when the market was still going strong.

Mutual fund managers are not allowed to arrange bank loans just to buy equities, for obvious reasons. They are limited to funds on hand. This is why a big shake-out is expected in the ETF market: too much money chasing too few investors.

Unfortunately worrying about her pension is all Carol can do. She has no control over any of it. This is assuming she is one of those receiving a private company pension, an increasingly small percentage of the US workforce. I believe the company pension percentage is well below 40% of the workforce these days, with 401k's being the preferred offering.

Many company pensions are simple insurance annuity policies. Again, the retireee has no say in what company is selected to provide the annuity. If the insurer goes bankrupt - as happened to our family in the past, destroying my FIL's dream of a secure retirement - you'll get pennies on the dollar returned to you, if you're lucky.

Most state/county/city governments have grossly underfunded their pension obligations. They have relied on overinflated ROI averages and a lack of regulation allowing them to put off funding future obligations. Paper losses in the current market don't mean much when, even if we were experiencing an S&P 500 Index of 1450 (which, of course, we aren't), local government pension and retiree health care funds are currently underfunded by billions of dollars.

However, with the recent ruling by the Supreme Court in favor of municipalities reducing retiree benefits, such underfunding may not matter as much.

Funding a 401k and an IRA, whether Roth or Traditional, should be done by everyone. And the downturn in the market is exactly why dollar-cost averaging can work to your advantage, in the long run.


 o
RE: Current Market downturn

jkom51-"Paper losses in the current market don't mean much when, even if we were experiencing an S&P 500 Index of 1450 (which, of course, we aren't), local government pension and retiree health care funds are currently underfunded by billions of dollars. Funding a 401k and an IRA, whether Roth or Traditional, should be done by everyone. And the downturn in the market is exactly why dollar-cost averaging can work to your advantage, in the long run."

Paper losses don't mean much? Dollar-cost averaging can work to your advantage, in the long run?

I'd be interested to know your opinion about the following:

"Many brokers have been trained with up to seven sales pitches designed to keep you in the market come hell or high water.

Broker Pitch #1: "Buy more." Their argument goes something like this: "Your stock is now selling at bargain prices. So if you didn't already own 100 shares, you'd probably be thinking about buying �" not selling. Instead, why not double down and take advantage of DOLLAR-COST AVERAGING?"

The more likely result in a bear market: Every time your stock falls by another $1 per share, instead of losing just $100, you'll be losing $200.

Broker Pitch #3: "You can't afford to take a loss." If you insist on selling, brokers often come back with this approach: "Your losses are just on paper right now. So if you sell, all you'll be doing is locking them in. You can't afford to do that."

What they don't tell you is that there's NO FUNDAMENTAL DIFFERENCE between a PAPER LOSS and a realized loss. Nor do they reveal that the Securities & Exchange Commission (SEC) requires brokers themselves to value the securities they hold in their own portfolio at the current market price �" to recognize the losses as real whether they've sold the securities or not."


A link that might be useful:

Sell, Hedge ... or Be Prepared to Lose!
by Martin D. Weiss, Ph.D. 06-30-08
www.moneyandmarkets.com


 o
RE: Current Market downturn

dreamgarden: "Paper losses don't mean much?"

No. They. Don't.

Let me give you a real world example: Almost exactly two weeks ago (July 3) I bought a bunch of BAC @ 21.96 because I thought it was undervalued. Seven trading days later (this past Tuesday), it was down to $18.44, a substantial PAPER LOSS of $3.52 a share, or approximately 16%.

Less than three days later, and as of 2:45 p.m. this afternoon, it is trading at $27.50. That's a 49% gain from the low, and a full 25% gain on my investment in 2 weeks! I'm planning on selling part of my investment before the market closes at the end of the day to lock in that profit. Everything else will just be gravy.

So, tell me again, why I should have been concerned with the short-term paper loss?


 o
RE: Current Market downturn

I don't know what river this is that's under discussion ...

... but it seems to me that the "current" market downturn referred to in the title is a rather persistent "current", after all.

Something like an "undertow" in a lake?

Those things can drown a guy!

(Gal,too).

ole joyful

P.S. If the "paper loss" company has goofed (or the market goes really sour) some of the temporary "paper loss" illnesses have a tendency to become rather chronic illnesses.

Or so I've heard.

Best wishes for keeping your powder ...

... and your humour ...

... dry.

ole joyful

ole joyful

P.P.S. (That reiterating of my name is just me assuring myself that I really will live to fight another day).

As one approaches 80, such assurances assumed increased importance.

o j


 o
RE: Current Market downturn

The current issue of SmartMoney headlines "World's Greatest Investors", Warren Buffett and his ilk (Dan Fuss, Amit Wadhwaney, Jane Mendillo, David Winters). It was an interesting read, and what was fun was that each profile highlighted their "best call" and "worst call". IOW, what they'd picked in the past that was gangbusters, and what turned out to be a total dud. Nobody can pick winners all the time.

Every time there's financial excess and a resulting crash, it takes time to work through. TIME - months and months on end. It doesn't happen in weeks, much as we'd like it to.

I went to an investment seminar given by PERS (state retirement system). As I've said before, according to their own stats, on average working employees keep 80% of their assets in bonds and 20% in stocks, the exact opposite of what they should do.

The speaker (a broker, not a CFP however) mentioned that a 20-yr average ROI should be about 8%. Some of the people there admitted they had not made anywhere near that amount. They got scared during the once-every-decade crashes, fled into bonds, and have suffered ROIs of 3-4% as their 20-yr average as a consequence.

It's a natural reaction, and I don't blame them for it. But the fact remains, in trying to be "safe" one very often misses the inevitable market recoveries. If I have doubled my money (or my home equity, for that matter) in ten years, then lose 25%, I am still ahead of the game. A paper gain means little more than a paper loss, it's all just a yardstick on a moving target.

The lesson is to not let yourself get wound up into knots about things you can't control. Be careful, be prudent, but act reasonably, not from fear.


 o
RE: Current Market downturn

jkom: "The speaker (a broker, not a CFP however) mentioned that a 20-yr average ROI should be about 8%. Some of the people there admitted they had not made anywhere near that amount."

Excellent post, jkom. It is also important to point out that stocks have never - - - I repeat, never - - - lost money during any rolling 20 year period going back to 1926. And its ROI has always outperformed bonds, CDs, etc, during the same time periods.

One other point. With an 8% return, your money will double in 9 years and then double again in another 9. If you're only making 3% a year, your initial investment wouldn't even have doubled once during that same 18 year time period. It would take 24 years for money to double with a 3% return. (The rule of 72.)


 o
RE: Current Market downturn

To clarify, I was talking about my 401k, not a pension. I've never worked for an employer that offered a pension.

I figured some people would be shocked that I wasn't opening my 401k statements right now. But knowing how much of a short-term hit my net worth has taken would probably only result in insomnia. I'm certainly not going to "sell low" and stupidly start shuffling investments around in a panic.

I've got a simple portfolio of several global and domestic stock-based index funds and a small amount in a bond fund, and chose them anticipating a fair amount of volatility. Well, I'm on the downside of that right now, and just have to sit tight and remain calm.

The statements are remaining happily sealed in their little envelopes.


 o
RE: Current Market downturn

>>I figured some people would be shocked that I wasn't opening my 401k statements right now<<

Congratulations - you have discipline and know yourself well enough that you can make yourself 'stick to the plan'. This is really what intelligent investing is all about - know yourself, know your limits, and be disciplined.

We have temporarily postponed our meetings with my MIL's investment firm during 2008. She has a low-volatility portfolio, so although she's lost a bit, it's percentage-wise less than we've lost. This is how it should be, since she's 81 and we're in our 50's with DH still working. When the market recovers, we'll gain more than she does, since we're more aggressively invested.

With the hysteria currently abounding, there's little to discuss. They and we agree on the current economic environment, we're comfortable with how she's positioned, and appreciate their help with our own portfolio. We're in this for the long-term - my MIL has an excellent chance of living to be 100 and very possibly even outliving us! - so there's lot of time in the future to be meeting and discussing her portfolio on a quarterly or annual basis, LOL.


 o Post a Follow-Up

Please Note: Only registered members are able to post messages to this forum.

    If you are a member, please log in.

    If you aren't yet a member, join now!


Return to the Household Finances Forum

Information about Posting

  • You must be logged in to post a message. Once you are logged in, a posting window will appear at the bottom of the messages. If you are not a member, please register for an account.
  • Please review our Rules of Play before posting.
  • Posting is a two-step process. Once you have composed your message, you will be taken to the preview page. You will then have a chance to review your post, make changes and upload photos.
  • After posting your message, you may need to refresh the forum page in order to see it.
  • Before posting copyrighted material, please read about Copyright and Fair Use.
  • We have a strict no-advertising policy!
  • If you would like to practice posting or uploading photos, please visit our Test forum.
  • If you need assistance, please Contact Us and we will be happy to help.


Learn more about in-text links on this page here