This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Tuesday, October 7, 2008

Economic Chaos: So Now What?

Posted By Paul

I'm sure I don't have to tell all of you about the crazy things going on in the economy right now.

The stock market is going crazy, mutual funds are all over the place (mostly down). I had one of my funds drop nearly 8% in one day! That is a tough thing to see and not do something!

So I keep trying to think of something useful to put in this blog to address this. So here is my best two-bit opinion of what's going on:

1) The economy in general is in a crazy time.
2) No one knows how long it will last (least of all me).

So based on those two facts here is my plan for dealing with the current landscape:

1) I'm not going to make a run on the banks. Currently my money is in financial institutions that seem stable, so I'm not going to rush out and try to take all my money out in cash.

2) I'm not going to dash out of the stock market. I COULD take everything I have invested in mutual funds through my 401k and sell them all immediately. The problem with this is that I'd be selling my funds at a low based on what is hopefully a short term situation (see my earlier post Article: Don't let the crisis spook your 401k).

3) I'm going to try to view this as an opportunity. Warren Buffet is a big believer in the idea that when the market is down its a great time to buy stuff (since everything is cheap). Of course this assumes that the market eventually recovers, but this is the risk inherent in the stock market. I'm going to try to view the stock market with this attitude.

4) I'm going to make sure that my investments are where I want them to be. If there's a bright side to this crisis, it's a great reminder that you should make sure your money in where it should be based on your plans for accessing it. For example...I have most of my rainy day fund in low-risk savings bonds, CD's, and savings accounts. Since this is money that I might need to access at any time, I don't want it in anything high risk. Part of my rainy day fund (about 15%) is also invested in the stock market, in what I consider to be some pretty conservative stocks. This for me is just fine. In all of this turmoil 85% of my rainy day fund continues to collect it's small but no-risk interest. The other 15% still fluctuates, but the fluctuations are small enough that I can live with it. Also with my retirement funds I need to remember that I don't plan on touching this money for decades so I shouldn't worry too much about market fluctuations. Yes, things are going crazy now, but I REALLY hope that in 20 years it's all an unpleasant memory.

5) I'm going to try to beef up my rainy day fund. Even though the value of my rainy day fund is pretty stable, I'm hoping to add a little more to it for a while, just for my own peace of mind.

Not the most dramatic plan. Essentially I plan to bulk up the savings if I can, but I will continue to invest in my 401k in anticipation of a stock market rebound.

How are other people out there dealing with the craziness?


TJ said...

I'm looking into getting a few chickens and a cow. Plant some vegetables. Stock up on canned goods.

Seriously, if you're young your plan seems reasonable. Do your best to ride this out and hope the dollar-cost-averaging turns it into a benefit before you need to start living off your investments.

I'm curious why you're investing *any* of your rainy-day funds in equities. Seems counter-intuitive to me.

Paul said...

You make a good point. I guess I define my rainy day fund as money that I've put into low-risk investments that I can access quickly and that I don't have earmarked for retirement or some other specific expense.

On the one hand, it's true that there is risk there, but I also feel like my equities do represent money I can access quickly, plus even in these crazy times they are holding their value well.

If my equities ever significantly drop in value, then it means my rainy day fund does as well. That's one reason that when I talk about beefing up my rainy day fund I'm specifically referring to things like savings accounts, CD's, etc.

I don't plan on buying more securities as I add to my "rainy day fund". I just made the decision that my equities (which I purchased before I was focused on building up a rainy day fund) were conservative enough that I would consider them part of my rainy day fund.

I would DEFINITELY agree that if someone had a significant amount of their rainy day fund in the stock market that they were taking some big risks and were missing the point of having a rainy day fund in the first place.