Uncommon Cents

Prices in the housing market have only been coming down very gradually here in the islands, although they definitely are coming down. However, after this past week’s stock market debacle (and the whole last year after the market hitting its all time high), I have to think that the housing market is going to get worse for sellers (and better for buyers) before it gets better (and worse, for those looking to buy). The reason I say that is this:

Exactly who out there who doesn’t already have a house is thinking that they can buy one after seeing their portfolios bottom out?

In time, the reduction in interest rates and a (hopefully!) loosened credit market (although we certainly do not need the subprime mess once more) will jump start the whole economy, including the housing market, but the prices of houses–at least around here–are going to have to come down in order for typical working class people to be able to actually afford them again.

In the meantime, if you’re looking to sell, I’m hoping you’re not in a position where you absolutely need to; if that’s the case, things could get pretty rough.

Yes, even here in the islands, gas prices are (finally) starting to come down. By no means is gas a true “bargain”, but compared to prices in July, things are improving considerably.

Fuel prices have been so high for so long that they definitely contributed to the slowdown in the economy. For most folks, fuel costs are not a luxury or optional, they’re a necessity. Personally, for me to reduce my fuel usage by 5%, as documented in this blog, has been a struggle. But that said, people have managed to reduce their use in light of high prices and the speculators in oil trading have been hung out to dry the last few weeks, with crude oil coming down in price about 40%. While this is more likely to result in about a 20% drop in fuel prices (40% would be fantastic, but unrealistic), it’s also resulting in people having a few more dollars to spend on things aside from fuel. This kind of discretionary spending is the kind that helps to boost up the economy, so it’ll be welcome.

Lower fuel prices will also help businesses that are directly or indirectly dependent on the price of gas and energy (and which businesses aren’t?) keep costs down and hopefully turn more of a profit.

Whether they’ll be down for awhile no one really knows right now, but it’s the brightest spot of only a few I can see in the economy right now.

Just a year after hitting its all time high, the stock market is about 40% off of that high, to levels not seen since 2003. It’s a tough time for many, and if you’re close to retirement and your asset allocation was out of whack, you probably hurt more than others. Looking at current stock market levels definitely hurts.

But just because the hurt happens, don’t make it hurt more.

Pulling out of the market. Selling all your funds and moving 100% into cash. Discontinuing contributions to your retirement savings plan. All of these are ways to ensure that the market isn’t going to just hurt now, it’s going to continue to hurt for a long time to come.

You don’t have to believe me. Warren Buffett is buying stocks. John Bogle is telling investors to get back to the basics of investing. These are two of the most successful finance gurus of our time. Just do the smart thing and follow the plan you made; in the end, you’ll be better off, and you won’t hurt yourself any more than the markets have already hurt you!

I realize that people often let their emotions dictate their behavior (if not, people like me–social workers–wouldn’t have a job!). However, it’s really important to do as much as you can to plan and prepare beforehand to not let difficult times and difficult feelings affect your judgment when it comes to something like investing.

If you are investing for the long term, the most important thing to do is to have a plan. Your plan needs details, of course, but the basics are the same:

Invest regularly; take advantage of any employer matches and tax breaks offered to you; have a reasonable asset allocation; diversify; and keep costs low.

In the long term, it’s been shown over and over again that this is definitely a winner. A plan like this points out the difference between simple and easy. Coming up with this plan is simple; as we saw when we looked at, for instance, the Coffeehouse Portfolio, it’s easy to come up with a portfolio that fulfills all of those criteria. Following it, however, is not always easy when people have their emotions interfere with their behavior.

Yes, the stock market can be–and right now is–a scary place to be. But while it’s perfectly okay to be afraid, remember that it’s important to be brave. Follow your plan–you came up with it for a reason, and it was more than reasonable when you did. Stick to it; if your fundamental planning was sound, you’ll end up a winner in the long run.

Planning isn’t just for emergencies; it’s also for your investing. One of the most important things to remember in investing is not to just have a plan, but to follow it.

Times like these, when the stock markets are in bear market mode, are the times to remember to follow your plan. I’m seeing more and more of my personal finance blogger colleagues worrying that they’re throwing good money after bad and considering switching their asset allocations dramatically. If your plan was sound when you made it, follow it! Also consider this: one year ago, when the markets were right around their all time high, was it a better or worse time to buy stocks than right now?

Food for thought.

What’s the main driver of the U.S. economy?

The answer is in your mirror. It’s you.

Consumer spending is the biggest single factor in the well being of the U.S. economy. Notice how the second quarter (2.8% annualized growth of gross domestic product) wasn’t so awful? That coincided with the delivery of economic stimulus payments going out across the nation. Those dollars got spent, and the spending helped the economy.

While the economy has grown over time, driven by spending, during that same time the savings rate of those in the U.S. became negative–people spent more than they made. Anyone can tell you that can’t go on forever. People went into typical consumer debt (including credit cards) and then, hanging on the coattails of the housing boom, took out home equity to keep spending.

All things come to an end.

The current credit crunch and real estate debacle have devastated these money supplies; combine that with the increase in fuel prices (which follows into the realm of essentials), and it’s clear that the average consumer can’t keep pumping more dollars into the economy, because they don’t have the dollars to do so–not even borrowed dollars.

Until consumers can somehow put more dollars into the economy, the economy will continue to suffer, and until the economy improves, it’s hard to imagine consumers putting more dollars into the economy. Seems like a Catch-22? In many ways it is, but that’s the situation we’re facing ourselves in today. Stay tuned!

Some people discover their risk tolerance is rather low, or lower than they thought, in stock market times such as these. If that is indeed the case, what options do these people have?

The principle of risk/return does not disappear just because someone can’t deal with somewhat higher risk; rather, it becomes very clearly in effect. If someone wants to take absolutely no chances with their money (or just shy of no chance), they can certainly do that, but the returns their money will gain will be quite low–but they will exist. This is unless it’s someone who would rather bury money in coffee cans in their back yard or stuff it in their mattress, of course–but that’s not investing.

Realistically, everyone needs a safe place to put at least some of the dollars they have. An emergency fund needs to be kept away from stock market risk, because emergencies don’t come on a schedule (some would say the market currently is in a state of emergency!). So “chicken money” is something everyone has at least some of–money we’re too chicken to put at any risk at all.

Savings or Share Accounts: These are your typical accounts at a bank or credit union. Right now the rates of interest on them are anemic–in the case of my mother’s bank account, one fourth of one percent of interest! That’s definitely not keeping up with inflation. However, since the account is FDIC insured and she’s well within the limits of the insurance, it’s as safe as the federal government’s word. If you’re going to use one of these, make sure you have insurance by the FDIC or the NCUA (in the case of a credit union). You won’t make much, but your money will be safe, and it’s really high in liquidity, meaning you can get at your money pretty much anytime (provided the bank’s business hours work for you).

High Yield or Money Market Accounts: These tend to be a lot like savings or share accounts but with a somewhat higher rate of interest and possibly more limits on accessing your money. For instance, I have a Capital One Direct high yield savings account that pays me 3.55% interest and allows check writing and ATM access–but limits how many checks I can write per month. Fortunately, it also allows electronic access, which is a bit more liberal. This is a nice place to stash an emergency fund, since it’s almost as liquid as a savings or share account.

Certificates of Deposit: CDs tend to have rates about the same if not a little higher than high yield or money market accounts. In return for offering a little more interest, you lose liquidity. Still, CDs you may be appropriate for an emergency fund with a little planning (having a CD mature every month with 5/6 of an emergency fund means at most you’d be one month away from access, and having that remaining 1/6 in something like a high yield account could do it) but for simplicity’s sake, you may not want to use these for that purpose. Make sure you are wary of the FDIC limits (which apparently will be increasing, at least for awhile) on how much they’ll insure if you really are concerned about safety!

Treasury Bonds or Notes: In many ways considered the safest of investments, there are lots of different bonds and notes you can get; some may offer tax advantages. I have a bit of my portfolio in I series bonds, for instance. There are also government issued bonds or notes from local or state governments that may be worth looking into as well. Again, the rates are not fantastic, but combined with possible tax advantages as well as safety, this could be a viable option.

Money Market Funds: Not quite the same as the money market accounts, these are mutual funds that invest in short term instruments. They are not backed by FDIC or NCUA insurance as they are mutual funds, although they recently had some temporary insurance offered to them with unusual circumstances that led to a “run” on them as a consequence of the Lehman Brothers bankruptcy. Money Market funds nearly always have a stable net asset value of $1 per share and pay a return based on how their investments do. Of course, since it’s a mutual fund, your initial investment will likely need to be more than you can put into a savings account, money market account, or CD, and you may have commissions to deal with.

Bond Funds: In bond funds, you have a ton of choice just as you do with stock funds. If you’re looking for safety, consider the quality of the bonds in the fund; “junk bonds” may offer higher yields, but more risk. Funds that are based on Government National Mortgage Association bonds–Ginnie Mae funds–tend to be both very safe and pay very nice returns. A fund like the Vanguard Total Bond Market Index has offered similar performance and safety to the Ginnie Mae funds over time. Again, these are funds, but unlike the money market funds which almost never move off the $1 per share net asset value mark, these do fluctuate a bit, but historically, nothing like stock funds.

There are some alternatives–from about as safe as you can get to pretty safe with some amount of risk–to consider for your chicken money, whether that’s just your emergency fund or your whole portfolio. Good luck in selecting one that might meet your needs!

This is being written the night of Wednesday, October 1, 2008.

Just a few days ago the House of Representativest rejected the $700 billion bailout package which almost every personal finance blogger I’ve read opposes. It actually was a nice demonstration of the power of the people in politics, as apparently the switchboards were overloaded with objectors–of course, the impending elections in a hair over a month make the politicians very aware that their constituents are their bosses.

Of course, it ain’t over until it’s over, and I (among many others) was sure that the bill would somehow get through, just hopefully with a lower price tag.

What’s passed as of now from the Senate is still at $700 billion bailout package, but with some changes to hopefully make it more palatable to the House.

Come on, people! The big issue is not these changes; the big issue is the dollar amount! We can’t afford a $700 billion dollar bailout package, it’s that simple. Find a way to do it with less, or forget about it and go in another direction.

If you are interested in borrowing money right now, you’re likely going to have some difficulty. The credit crunch has made lenders fearful. While interest rates for individuals are pretty low (both for savers and borrowers), rates that the banks charge each other to borrow have remained higher than expected. In addition, banks are just a lot less willing to lend money right now. It basically seems like the only way you can get a loan now is to prove to the bank you don’t need the money.

This is a 180 degree turn from a few years back, when the housing market was booming and subprime loans were everywhere. At that point, you practically had to shoo lenders away; today, you can’t get them to come over if you invite them for dinner.

Where does the answer to all of this lie? Clearly, somewhere in the middle. The economic crisis that’s going on right now was caused by lending practices that were far too lenient; now, it’s being extended because almost no one can borrow money. There’s a need for responsible, reasonable lending practices that don’t end up in foreclosures and defaults but are more accommodating to economic growth.

…I’d tell them to stop acquiring new debt. Right now.

I’d tell them that there were things they wanted to buy that they couldn’t afford–like $700 billion of bailout money and Medicare Part D (well, too late on that last one).

I’d tell them they need to figure out where their money’s coming from and where their money’s going and to figure out how to spend less–by making difficult decisions and sacrifices–and how to increase income–even if it means increasing taxes.

I’d tell them to get started on an emergency fund for rainy days–like the rain that’s coming down right now!

I’d tell them to figure out where their worst debts are and to put the majority of their money there; to consider snowballing their debts or to pay off the highest interest rates first, but to have a strategy of some type to effectively pay their debts, including refinancing them if necessary.

And I’d tell them this was not going to be easy; it was going to be difficult, it was going to take a long time, and everyone in their family would need to sacrifice, but in the end, it would be well worth it.

Funny how if the businesses and individuals who got this financial fiasco going in the first place had done their personal finance homework in the first place… there wouldn’t be a financial fiasco going on.

Well, sadly, no, not funny.