If you haven’t been unconscious for the past year, you’ve more than likely seen commentary about the current financial climate being deeper than any we’re seen in decades, if ever. Already people are calling this one of the worst economic environments since the Great Depression, even using the nickname, ‘Great Recession’. Financial media outlets, from Money magazine to CNBC, report on how this downturn has affected investors, businesses, and workers, noting the changes all of these groups are making in order to cope and survive during this time period. And it is in this environment that I got my financial start.
It’s been less than a year since I first started to think about my finances in any kind of long term, serious way, and even less time that I’ve actively been taking actions to improve my financial future. Much as the Great Depression shaped the mindsets of those who lived through it, the ‘Great Recession’ is going to have a huge impact on those people in my generation; I’m just not sure the lessons some of my cohorts are receiving are the correct ones. I’ve heard many questionable claims, if not downright false ones,even from my own family members. Here are a few that I have encountered:
“The Stock Market is Too Risky” – This is exactly the wrong lesson to learn if you are young and have plenty of time before you retire. The stock market is one of the few ways to ensure that your money will grow enough to enable you to retire by the time you hit 65 (or earlier, if you invest a sizable amount and begin early enough). Furthermore, investing in a broad based index fund and regularly contributing money is a good way to ensure that you will have enough by the time you retire.
What you should think: “The Stock Market can be volatile” – A good lesson to take from this downturn is that the stock market, while moving broadly upward, can and will bounce around in valuation over the short term. The key to profitability in the stock market for the average investor, then, is to hold a diversified portfolio and to avoid focusing too much on the day-to-day movements of your investments. As you get closer to retirement, you should decrease the amount you hold in stocks and add more to your bond and cash stakes; the lowered volatility will help in both simplifying planning out your future and decreasing the chance of an eleventh hour panic due to dropping investments.
“It’s Safer to be in (CDs, bonds, Treasuries, etc.) Than Stocks” – Akin to the last comment, this one misses the forest for the trees. Yes, all the mentioned investments will be less volatile than stocks in the short run, but if you are invested predominantly in them (or worse, entirely, as my sisters plan to do), you will giving up a great deal of growth. The only ways to recover from such a loss of potential gains are to increase the amount of money you put aside or be willing to work longer; neither are terribly attractive prospects.
What you should think: “Stocks for growth, bonds for safety” – This old chestnut still holds true, and reiterates what I was saying before: use stocks to build your money, then shift that money into less volatile investments as you get older to preserve it. You’ll maximize the growth while still protecting your money for when you need it.
“I’ll think about investing when things start to look better” – I have news for you: if you think you can tell a recovery early enough to get in when stocks are at their lowest, I have a bridge to sell you. There’s a good chance you will miss much of the upside of the recovery when it comes if you wait until there are definite upward trends. Plus, if you get in the habit of pulling out your money when the economy is looking rocky and investing again when it picks up, you’re likely going to be buying high and selling low, the exact opposite of how your want to invest.
What you should think: “The Best Time to Start Investing is Now!” – No matter when now is, you will almost certainly be better off in the future if you start investing now, as opposed to waiting. If you are worried about getting into the market just as it’s about to fall, you can always dollar cost average your investments over time (that is, regularly invest a small, fixed amount rather than put in all the money at one time). Not only will this allow to avoid any sudden drops right after you invest, but you will also help develop the habit of putting new money into your investments on a regular basis.
With any luck, the fellow members of my generation will be able to shake off the worries and fears they have about investing, while still holding onto some of the things this downturn can teach us, like ‘don’t get a mortgage that could become unaffordable to you’ and ‘having savings can help you in a downturn’. Take the good lessons and leave the bad; that’s the way to success.
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MLR
on June 1 2009
Good advice!
A lot of it does ask people to go against their nature, though. After watching parents and loved ones lose 40% in their investment portfolios, MOST people will have an inhibition to going into the market. Understandable, but you have to put that behind you!
MLR
Roger
on June 1 2009
@ MLR:
It does go against the nature of most people, but then so does much of financial planning; putting aside resources for years, decades even, to save for a retirement that may never come isn’t the sort of thing people have been doing for a very long time. Heck, the modern concept of retirement isn’t that old itself; it only dates back to the railroad pensions on the nineteenth century, if that.
But indeed, while it is an understandable impulse to be afraid right now, it’s good to remember Warren Buffett’s advice: ‘Be greedy while others are fearful and fearful while others are greedy.’ Invest now, and you’ll be in good shape when things turn around (which they will, doomsayers aside).
Roger