Thursday, July 17, 2008

Deer in the Headlights

I am off the grid for a mere 5 days (our annual Yosemite trip), and I come back to find our nation's financial system teetering on the precipice.

Coming back to all the news reports, which I still haven't quite sifted though, my general mood about the future has gone from nervous trepidation, to helpless and overwhelmed angst.

Let me start by saying, we are a very average American family. We don't have an army (of accountants, financial advisers, lawyers, tax preparers etc.) at our beck an call to offer advise and expertise. We also come from working class families, so we really don't have any trusted relatives we can turn to for this type of advise.

While my gut has been telling me we were headed for rocky economic times, I have been at a loss as to what actions to take in response. The vast majority of our savings is in 401k (except our down payment). Back in January I attempted to read up on my 401k investment options to look for a safer choice going forward. But with all the disclaimers they put in, its really hard to tell what the true risk is for each fund....even the money market and cash reserves seem to have large disclaimers about no guarantee on your principle. Needless to say, I didn't get very far, and gave up. In hindsight, I would have been much better served to have found some help on this.

At this point I am a bit like a deer in the headlights. To preserve the purchasing power of our down payment, I feel we should buy a home soon, as a hedge against inflation and higher interest rates. But at the same time I don't want to purchase a depreciating asset, which is also a quick way to lose our down payment.

I have developed this nagging feeling that I need to be doing something to prepare ourselves financially and physically for hard times ahead, yet I am at a loss as to what exactly those preparations should be.

I am also starting to wonder if I would be better off in ignorant bliss. I would love to know what others have done in response (to the future prospects of our changing economy), if anything.


Sippn said...

The market panics every day, one way or another.

Have you ever worked with people who are still gathering information long after others have made the decisions and are executing the plan?

Jacob said...

The Stock Market is too volatile for me. Financial stocks are way up the past few days and getting hammerred. There is a great opportunity to lose a lot of money right now.

Home prices are declining, factor in the declining purchasing power of the dollar and they are really falling, but that doesn't matter.

I got my money in FDIC insured accounts. Getting about 3-4%. I could be invesint in the stock market and be down 10% or more instead.

So unless you really know what you are doing, I would just stick to 100% safe investments like a CD or savings or deposit money markey account.

Keep looking for the right home and buy it when you find the perfect one.

Buying Time said...

"So unless you really know what you are doing"

That is precisly my problem...I don't. Which is why I am watching my 401k earnings evaporate....and still waiting for someone to sell me a house at a price I am willing to pay.

This situation leaves me feeling very helpless...since I am at the mercy of the market on both fronts.

Patient Renter said...

Basically we've just kept our expenses low, dumped more cash into our emergency savings, and moved our retirement investments (401ks and IRAs) to cash last fall. It still doesn't feel like we're being as conservative as I'd like since our quality of life is the same as it's always been... but I guess that in itself sets us apart from our neighbors who boosted their quality of life with artificial wealth during the boom.

To preserve the purchasing power of our down payment, I feel we should buy a home soon, as a hedge against inflation and higher interest rates

Inflation (I'm sure you mean rising prices) aren't a factor in homes since prices are going down there. Sure your dollars buy you less of a lot of things nowadays, but a home isn't one of them. Regarding rates, as others have pointed out before, better to buy a cheaper house at a higher rate, with a future refi as an option, particularly since the lower prices allows for a shorter payback duration.

Patient Renter said...

(another long post, sorry).

I am watching my 401k earnings evaporate

I am by no means a finance guy so take this for what it's worth, but I'll just point out two things:

First, the biggest investment mistake is getting scared and selling low. Just as with the housing market, the stock market will recover and eventually your 401k will get back to where it was and grow. As long as you have a long term outlook (not retiring anytime soon?) it may be best to just let things play out. I say this since the stock market is not at all like the housing market, and when it does turn it IS easy to miss the bottom and get back in a bit too late.

The second thing I'll point out is that passive investors (those who don't follow the market) beat active investors on average. This includes the idea that index funds beat actively managed (by people) funds (for this reason I strongly recommend using index funds whenever available). The reason is simply that passive investors don't buy or sell based on market conditions, they simply set a target allocation and seek to maintain it indefinately. This is the buy and hold strategy.

So... I'd definately want to ensure that the funds you own meet an allocation that is appropriate for you (perhaps a financial advisor through your company can help you with this), but once you have that, I buy into the philosophy that the best thing to do is to set it and forget it. I should mention that my own situation having broken this philosophy was due to the fact that I was in the midst of changing jobs and rolling over investments right as I felt the market was in for a downturn, so I decided to go all cash for a while and wait before resuming my target allocation. Some buy-and-hold purists take issue with even this, but it's worked out for me.

Buying Time said...

Thanks for the pep talk PR. I am essentially a buy and hold index funds kinda gal, for all the reasons you suggested. But reading the articles lately about how that strategy would net you very few gains over the last 10 years, has caused me to question this strategy (but at the moment, I haven't found a better one).

HOUSE2008 said...

Here's my 2 cents. I've been contributing a good part of money to 401k & each statement I get back goes on to say "you lost $200" this month period, whatever. Well this has been going on for some 6 months now & got tired of it. I've reduced this to a token & taken the cash & bought some "cheap" stocks. I'll take a chance as opposed to having the 401k lose 200+ a month. At least now I have some "big name" stock cheape than a Latte at Starbuck.

Eban said...

My 401k currently sits at -13% year-to-date. Am I panicking? Nope. I don't retire for another 30 some-odd years, and there is plenty of time for the market to turn around. Losses now mean more shares purchased at a low price to increase in value later. Stopping your contributions to your 401k is just silly, as long as your retirement is many years away.

G Spot1 said...

I'll echo PR's and eban's sentiments on the 401k. I'm about 30 years from retirement, so I'm still have a pretty aggressive balance. My financial planner convinced me that it was best to be about 80/20 stocks bonds - I had been about 90/10. I really don't worry about the swings because I'm long term.

Two key points - First, don't stop adding to the 401k. Aside from needing to continue to save, this is a way to buy low on stocks.

Second, rebalance regularly. This is a way of selling high and buying low. If my 80/20 mix becomes 75/25 because of stock losses and bond gains, I get back to 80/20 which means selling bonds and buy stocks at a low price. When it goes to 85/15, I'm doing the opposite.

I'm no expert but these are good strategies, and are basically pretty "passive," requiring little work once you figure out you initial investment mix.

Going to cash for retirement money is a big mistake unless you are close to retiring. You will miss huge gains when it rebounds.

Put your downpayment in a FDIC insured savings account or perhaps a really strong money market (No CDO's or SIV debt!). You are really looking to preserve principal so you will have to give up some gain here. MM's are paying pretty low yields right now so best bet might be an Internet bank w/ insurance. If you have any bank accounts or CD's without insurance, get it out now. Today.

As for buying, who knows? We love are new place and don't worry much about losing value since we plan to live here long term (10 years, likely more) and we can afford our mortgage. Very significantly, we also have good job security, which may be one of the most important factors in anyone's purchase decision right now. It's certainly easier to tap savings in an emergency than try to get an equity line.

My 5 cents anyway (inflation jacked up the price)

Buying Time said...

As a result of everyone's advise and my hand wringing, I went through all my 401k data this weekend. Added up all my contributions, and compared it to current value. Since late 2001 when I started saving for retirement in earnest, it looks like I have kept up with inflation, plus a little extra.

Only bummer, last time I did this was in Sept of 2007...and my balance was essentially the same despite the continued contributions.