Much earlier this year, I bought a bag of M&Ms. My excuse was that these were special M&Ms, a tie-in with the Indiana Jones movie. (Remember that? A big deal, and a so-so movie, and totally over by now because the hype has stopped and the movie isn’t good enough to generate further interest.) I keep the empty bag in a kitchen drawer where I can see it occasionally. To remind myself that I bought the ad, not the product, and that I got caught by the hype.
Eating M&Ms is pretty much a complete waste. Great candy if you like sugar and are about eight years old. But I like dark chocolate, and the chocolate content in M&Ms is low. I figured this out a long time ago. So what does that M&M bag signify? That we can all be lured into buying something whose value is negligible, simply because of its tie-in. If I really care about M&Ms, if I want to associate myself deeply with them, then I can buy all kinds of alternative products wrapped around some candy. I can litter my house with M&M seasonal packages and useless containers, and other tie-ins, and more. Or if it’s Harrison Ford I want to identify with, I can buy a poster of him and put it where I’ll see it every day. This is a complete waste of my time and money, though. I don’t know Ford and I never will and he isn’t important or even real in my life. When we buy the M&Ms or the licensed product that makes the M&Ms attractive, we are affiliating ourselves, identifying ourselves, with a commercial entity that we see as attractive and strong. Perhaps unlike ourselves.
The reason to not do this is that we each need to create our own brand. The Internet allows us to create new brands every day via new online names, and then try them out on various sites. If we get tired of our brand, we can abandon it with no one the wiser except Yahoo or Google. Not that they actually care if ViolinGenius and MashupMaven are identities generated from the same computer.
But why our own brand, instead of buying into and/or wearing the symbol of someone else’s? This is a good question, because historically, many people have been happy to draw their identities from their service to someone else’s brand. The lackeys of the nobility wore their masters’ crests, just as today, a factory worker might wear a company uniform. But this only works if it’s a two-way street. The serfs were legally tied to the land of their baron and he in turn had legal responsibilities to them. Today in America, we can no longer pretend to ourselves that we will hold any job for a decade, let alone even five years. Given that, we can’t afford to put our identities into some company’s hands. They’re going to dump us and we’ll feel all empty and miserable because we lost our brand affiliation. So we have to create and maintain our own identities.
I admit this is scary. The best example is the difference between a secretary versus any other employee. Both have a boss. But the secretary is shielded by the boss directly, is answerable only to that boss, and can assume the mantle of the boss’s power to enforce her or his needs in the office. The office worker is one of a pool of workers who are supervised by a boss, but who cannot act for or in place of the boss, and who is not shielded by the boss directly. The office worker acts on his or her own. The secretary does not.
What we are seeing more and more today in our employment milieu is the absolute need for each worker to act primarily in her or his own interests by becoming a self-directed sole proprietor of her or his own business: A brand. If the employee doesn’t pay attention to what is good for her or him, then the employee gets caught by layoffs and downsizings. If she or he has created a brand and invested in it, the employee is already seeking another job before the catastrophe occurs. Or has forged the office affiliations to keep being seen as a value to the changing company and survive to fight another day. Being nimble and agile is very important to continuous employment today. Trying to meld with a company’s brand, and become a company man or woman, is a mistake.
When it comes down to dollars and cents, so is buying a branded product unless it fits our own brand’s goals. Thus, it’s okay for me to buy the M&Ms for an upcoming party, because they are finger food that doesn’t cause a mess, and people like them. But it’s not okay for me to buy M&M souvenirs such as dolls holding the M&M logo, because I don’t own M&M, nor do I work for M&M. Sure, maybe I root for the company.
And that leads us into the area of expenditures on sports memorabilia. A bunch of guys (or gals) is paid to play games for us. We choose which teams we like, and then we show our loyalty to them by buying tickets to watch them and licensed products as souvenirs. It’s a phenomenon that has been studied a lot so there’s no need for me to go into the psychology of it. But quite obviously, it’s another instance of buying into somebody else’s brand.
But what is left at the end of the day, as the team advances to the Superbowl or the old M&Ms holiday packages are discounted on the store shelves? The memory of someone else’s athletic achievement and an empty bag from the M&Ms. No progress made towards creating our own brands, and forging ahead to our own better future.
We need to think of ourselves first. Of what will help our brands, our lives, first. Back in high school, we were briefly encouraged to think strategically when it came to choosing a college. We weighed each school’s academic and social strengths. We asked ourselves if we were personally suited to certain schools. But after college, the choice did not appear to be in our hands anymore. It was all up to the employer to pick us. This is not true.
Do you want to work for a specific company? What are you doing to prove it to the company? Are you frequently contacting hiring managers, HR managers, or even clients of the company? Have you been carefully following the company in the financial press (which includes the Internet) so you know where the company is heading and what are its obstacles and strengths? Have you made an effort to train in the specialties that this particular company values? If you haven’t, then not only are you not branding yourself, but you aren’t paying attention to the company’s brand. When you get an employment interview, you want to come across as knowledgeable about the company, and knowledgeable about your own potential value to the company. And you don’t want to be vague. You want to be specific.
This requires work. But the fact is that it is easier to hire someone who knows all about a company than someone who knows nothing. Training takes less time. Integrating with the other employees and getting up to speed takes less time. That’s why a would-be Dallas Cowboys Cheerleader has an advantage over the other contenders if she takes dance lessons before trying out, if she makes sure her BMI is correct for the skimpy uniform, and if she also educates herself about the football team. Her goal is to take on the Dallas brand. It helps to know what that is, in detail.
But I don’t want you to do that without previously deciding what your own brand is, and how working for this other brand will help your brand. Don’t just buy a package of special M&Ms, or a Redskins hat. Know what that brand is, and most of all, what you will get if you associate yourself with it. Maybe for some people, wearing a Yankee cap is like being on the team, and that’s good enough. But recognize you are drawing your identity from something outside yourself, and thus you risk being hurt by situations in which you play no direct role. It’s a substitute for real life. And meanwhile, real life is happening to all of us, willy-nilly, and we need to find our brand and burnish it and make plans for our future. Not for the future of M&Ms.
Monday, December 22, 2008
Monday, December 1, 2008
Things to do Before You Lose Your Job
The economists are finally willing to admit we’re in a recession, because we actually could be heading into a depression and they certainly won’t admit that. The biggest problem most individuals may have to face in the coming months is job loss. Tens of thousands of good jobs, jobs with health benefits, have already been lost this year. More jobs will be lost in the ripple effect.
So today let's think about what to do prior to losing a job:
1. Start or increase your rainy day savings. Right now. You might not have much time before every dollar saved becomes critical. Even an extra $100 is going to look very sweet when you’re struggling to make ends meet on unemployment compensation.
a. Create an emergency savings plan and put it on automatic immediately by having deductions made directly from your paycheck.
b. If retirement is far away, consider reducing (not eliminating) your 40l(k) contribution to increase your rainy day savings quickly. Remember, if you have to break into your 40l(k) early, you pay a 10% penalty and income tax on that money. You need at least eight months in living expenses in your rainy day savings. They must be in an FDIC insured account and accessible without any penalty.
2. Make a list of areas where you can cut your expenses. You don’t have to stop these conveniences or lifestyle choices immediately. But you should list them and the dollar amount they can save, so if the worst happens, you know what to do immediately. Sample expenses you can list for cutting:
• Smoking. Duh. Pricey. Cut down or quit.
• Drinking. Alcohol is an expensive luxury.
• XM Radio, OnStar, Netflix, or any other service billed monthly as an automatic charge on your credit card. Try a less costly level of service or cut it out altogether.
• Cable/satellite television. Investigate cheaper deals.
• Phone service. Keep your phone number so you won’t miss out on any employment calls. But try cheaper phone suppliers, or month-to-month minimal service, or even pay-as-you-go service.
• Haircuts, massages, manicures, etc. Go less frequently or find a cheaper-but-still-good supplier. Or stopping altogether. Most of us can skip pedicures, since no future employer will see them unless we’re going to work in sandals.
• Newspaper/magazine subscriptions. Do you read what you pay to receive? Can you get the same information elsewhere?
• Buying drinks and snacks whenever you are doing errands. It’s good for your waistline, too.
• Yoga and other exercise classes or gym memberships. Yes, they reduce stress, but look for less expensive adult education leisure classes or free classes instead. Or start your own at home.
• The best seats at sporting or cultural events. You might still go, but go to fewer events and buy the nosebleed seats. And don’t eat while you’re there; you’ll save a fortune. If you can use public transportation or park a little farther away, you’ll also save a bundle.
• Attend movies or other events at bargain times. And don’t buy from the concession stand.
• Entertain friends as a lunch date instead of a dinner date. Limit alcohol when dining out since it’s very expensive.
• Stick to a budget for presents, seasonal decorations, and foods.
3. Do not take on any new, long-term expenses. Samples of long-term expenses you should not sign up for at this time:
• Car leases. Nearly impossible to break, and you won’t own the car.
• Luxury car purchases. Any car you can’t afford is a luxury car. The payments and upkeep should be easy to cover each month, or don’t buy it.
• Magazine subscriptions. You pay it all in advance and you can’t get a refund.
• Sporting and cultural subscriptions. This is not the moment to commit hundreds or thousands of dollars far in advance. Put the cash in savings instead, and buy as you go. You could lose your job and have to move to another city and miss seeing the games or the shows.
• A purchase loan at a fixed rate whose total you couldn’t pay off this month if you had to. This could be for furniture, appliances, home improvement services, or any other big ticket item. This is not the right moment for big-ticket items. Sometimes they offer a nice deal, but what if you lose your job tomorrow? How will you pay off your debt?
• Any debt that you will not be able to pay in full if you lose your job tomorrow.
• Buying a new house unless you have the cash. Yes, it’s a buyer’s market. But unless you plan to live in the new house less expensively than in your current home, and have already sold that house, don’t do it.
• Overshopping, such as buying multiples of clothing or accessories. Assume that soon you may have no money to put in those handbags.
• Travel or other luxury spending, including electronics, clothing, and other toys. Don’t treat yourself to a blowout expense right now. You might very much regret that week at the beach or huge television when you’re scrambling to pay your power bill.
• Committing in advance to specific dollar amount of charitable giving. You might end up unable to make good on your pledge. Or you might try to sustain it at the cost of being short in some other area. Make your dollars go further by utilizing corporate matching funds or joining matching funds drives.
• Voluntary plastic surgery, lasik, braces, or other items that would lock you into a loan for a year or more. The exception is when disfigurement is too obvious and could cost you socially or financially.
• Organizing containers. You can organize your stuff without buying new stuff.
If we all followed this advice, then we’d be helping creating a depression by not spending. Which would not be a good thing for the nation’s economy in the short term. But we aren’t all going to be smart about our money. Some of us are going to keep on spending the same old way, buying too much junk, overextending ourselves with loans, and just hoping that it won’t all come crashing down on us. Not a good approach in an uncertain economy. Choose not to take this dead-end route. Instead, be one of the smart people. Think ahead to what you’ll need in the coming year, and take action.
So today let's think about what to do prior to losing a job:
1. Start or increase your rainy day savings. Right now. You might not have much time before every dollar saved becomes critical. Even an extra $100 is going to look very sweet when you’re struggling to make ends meet on unemployment compensation.
a. Create an emergency savings plan and put it on automatic immediately by having deductions made directly from your paycheck.
b. If retirement is far away, consider reducing (not eliminating) your 40l(k) contribution to increase your rainy day savings quickly. Remember, if you have to break into your 40l(k) early, you pay a 10% penalty and income tax on that money. You need at least eight months in living expenses in your rainy day savings. They must be in an FDIC insured account and accessible without any penalty.
2. Make a list of areas where you can cut your expenses. You don’t have to stop these conveniences or lifestyle choices immediately. But you should list them and the dollar amount they can save, so if the worst happens, you know what to do immediately. Sample expenses you can list for cutting:
• Smoking. Duh. Pricey. Cut down or quit.
• Drinking. Alcohol is an expensive luxury.
• XM Radio, OnStar, Netflix, or any other service billed monthly as an automatic charge on your credit card. Try a less costly level of service or cut it out altogether.
• Cable/satellite television. Investigate cheaper deals.
• Phone service. Keep your phone number so you won’t miss out on any employment calls. But try cheaper phone suppliers, or month-to-month minimal service, or even pay-as-you-go service.
• Haircuts, massages, manicures, etc. Go less frequently or find a cheaper-but-still-good supplier. Or stopping altogether. Most of us can skip pedicures, since no future employer will see them unless we’re going to work in sandals.
• Newspaper/magazine subscriptions. Do you read what you pay to receive? Can you get the same information elsewhere?
• Buying drinks and snacks whenever you are doing errands. It’s good for your waistline, too.
• Yoga and other exercise classes or gym memberships. Yes, they reduce stress, but look for less expensive adult education leisure classes or free classes instead. Or start your own at home.
• The best seats at sporting or cultural events. You might still go, but go to fewer events and buy the nosebleed seats. And don’t eat while you’re there; you’ll save a fortune. If you can use public transportation or park a little farther away, you’ll also save a bundle.
• Attend movies or other events at bargain times. And don’t buy from the concession stand.
• Entertain friends as a lunch date instead of a dinner date. Limit alcohol when dining out since it’s very expensive.
• Stick to a budget for presents, seasonal decorations, and foods.
3. Do not take on any new, long-term expenses. Samples of long-term expenses you should not sign up for at this time:
• Car leases. Nearly impossible to break, and you won’t own the car.
• Luxury car purchases. Any car you can’t afford is a luxury car. The payments and upkeep should be easy to cover each month, or don’t buy it.
• Magazine subscriptions. You pay it all in advance and you can’t get a refund.
• Sporting and cultural subscriptions. This is not the moment to commit hundreds or thousands of dollars far in advance. Put the cash in savings instead, and buy as you go. You could lose your job and have to move to another city and miss seeing the games or the shows.
• A purchase loan at a fixed rate whose total you couldn’t pay off this month if you had to. This could be for furniture, appliances, home improvement services, or any other big ticket item. This is not the right moment for big-ticket items. Sometimes they offer a nice deal, but what if you lose your job tomorrow? How will you pay off your debt?
• Any debt that you will not be able to pay in full if you lose your job tomorrow.
• Buying a new house unless you have the cash. Yes, it’s a buyer’s market. But unless you plan to live in the new house less expensively than in your current home, and have already sold that house, don’t do it.
• Overshopping, such as buying multiples of clothing or accessories. Assume that soon you may have no money to put in those handbags.
• Travel or other luxury spending, including electronics, clothing, and other toys. Don’t treat yourself to a blowout expense right now. You might very much regret that week at the beach or huge television when you’re scrambling to pay your power bill.
• Committing in advance to specific dollar amount of charitable giving. You might end up unable to make good on your pledge. Or you might try to sustain it at the cost of being short in some other area. Make your dollars go further by utilizing corporate matching funds or joining matching funds drives.
• Voluntary plastic surgery, lasik, braces, or other items that would lock you into a loan for a year or more. The exception is when disfigurement is too obvious and could cost you socially or financially.
• Organizing containers. You can organize your stuff without buying new stuff.
If we all followed this advice, then we’d be helping creating a depression by not spending. Which would not be a good thing for the nation’s economy in the short term. But we aren’t all going to be smart about our money. Some of us are going to keep on spending the same old way, buying too much junk, overextending ourselves with loans, and just hoping that it won’t all come crashing down on us. Not a good approach in an uncertain economy. Choose not to take this dead-end route. Instead, be one of the smart people. Think ahead to what you’ll need in the coming year, and take action.
Friday, November 21, 2008
How Not to Be an Alarmist
A few years ago, in an attempt educate myself, I read a book on economics. It explained how various economies in developing nations had been ruined by the flight of capital. This flight occurred just when the countries had taken stern measures demanded by the International Monetary Fund (IMF) to streamline and strengthen their economies. But the result was capital flight that collapsed their recovery instead.
But the US didn’t have to worry about that happening. Our economy was so strong that speculators would never just sell and run as they did from countries in Asia and South America. We were the model of stability for the entire world. Well, guess what? It sure looks like that’s what is happening. Oh, we supposedly are getting support from Europe and Asia, whose stock markets and economies actually depend on ours in this era of globalism. But what we’re seeing now is less money in the market. That’s capital flight. Without capital, a capitalist society can’t operate. Hence our government’s various attempts to shore up the market. Which some people look on with horror as socialism.
I am not sure what’s so wrong about socialism. My whole life, I have seen Americans get rich via their own ingenuity and drive. Should they pay taxes on their profits? Sure, why not? I pay taxes on mine. Is it socialism to take our tax money and help educate and lift people out of poverty? If so, I don’t mind. It has always seemed like a good investment. The more other people have, the less they’ll want to steal what I’ve got. I never liked communism. It never seemed fair to reward the incompetent equally with the competent. But that’s a theory of leveling, and our tax system certainly leaves plenty of juice for those at the top, even if they do complain about their tax burdens bitterly. And of course capitalism has some communistic elements, because it rewards the incompetent, passive owners (stockholders) of companies through the hard work of the employees. But I’m not here to debate systems. What’s the point? Real life economic problems don’t get solved by the application of theoretical social systems unless there is a terrible price paid, usually in lost human freedom or in famine or war. Real problems get solved by attacking what is going wrong and fixing it. Can this be done with the problems facing America’s economy today? Yes. Will it? The jury’s out on that.
What we do know is that our country doesn’t want to fall into a depression, and many people are working very hard to stop that from happening. A continuing problem seems to be intransigence, though. People and organizations that stubbornly refuse to face the reality that the old deal is done, and a new deal has to happen. The numbers of banks interested in working out foreclosures is very small. Still. The numbers of banks holding second mortgages (home equity loans) on properties in danger of foreclosure that simply refuse to make any deals is way too high. I am not sure if it is the sheer complexity of the banking system that is causing this mess, or just stupidity and short-sightedness, but it’s pretty obvious that the foreclosure crisis is getting worse, not better. We have to solve this, because land is real. Money is not. Once we stabilize land values, the rest of our economy will calm down.
All the media people running around and squawking about the economy should chill. Our stock market runs on rumor, on chatter. Right now, faced with the doomsday scenarios about our big automobile companies, the stock market is miserable and many healthy companies have seen their stocks tank. It doesn’t make sense. It’s sheer fear. And possibly some speculators running away. The talking heads on television and their blog-and-website counterparts of the Internet all get a charge out of talking negatively about the economy. But now so many of them are freaked out about the stock market that I am somewhat freaked out myself. Sure, everything can fall apart. But will it? Should I take their doomsday talk seriously? They keep talking and talking. But that’s the problem. They’re observers; they aren’t directly involved in solving our country’s economic problems. Once I turned off the television, I realized that I don’t think everything is going to fall apart. Not with so many people trying to make sure it doesn’t.
But let’s take the worst case scenario for a second. For Brazil in the 1990s, or Japan, things went seriously downhill. There was inflation. And falling values to all sorts of capitalist property. It was a mess. But they’ve climbed up from that point. Maybe not back to where they had been in the money markets. But when I visited Japan a year ago, the place looked solvent. People dressed well. The stores were full of people buying expensive items. There were plenty of fish in the market. So even if the US completely screws up our money economy and our land economy, I have to believe that some day, we will recover. Why? Because we’ve got land, we’ve got resources, we’ve got a healthy, educated work force, and we’ve got drive. We also have the Internet and a lot of bright ideas. I say the future is going to be good. We just have to stop being so scared.
A decade ago, a lot of Americans indulged in millennial fears. But I was too busy to stockpile water and toilet paper for the coming of the apocalypse. Since then, we’ve had 9/11, and more fears, some of them justified but most of them not. And now this, the economic meltdown. Is it finally time to stock up on toilet paper and bottled water? Get more shells for the shotgun so we can live on deer meat? I don’t think so. This country isn’t falling apart any day soon. So let’s not freak out.
But the US didn’t have to worry about that happening. Our economy was so strong that speculators would never just sell and run as they did from countries in Asia and South America. We were the model of stability for the entire world. Well, guess what? It sure looks like that’s what is happening. Oh, we supposedly are getting support from Europe and Asia, whose stock markets and economies actually depend on ours in this era of globalism. But what we’re seeing now is less money in the market. That’s capital flight. Without capital, a capitalist society can’t operate. Hence our government’s various attempts to shore up the market. Which some people look on with horror as socialism.
I am not sure what’s so wrong about socialism. My whole life, I have seen Americans get rich via their own ingenuity and drive. Should they pay taxes on their profits? Sure, why not? I pay taxes on mine. Is it socialism to take our tax money and help educate and lift people out of poverty? If so, I don’t mind. It has always seemed like a good investment. The more other people have, the less they’ll want to steal what I’ve got. I never liked communism. It never seemed fair to reward the incompetent equally with the competent. But that’s a theory of leveling, and our tax system certainly leaves plenty of juice for those at the top, even if they do complain about their tax burdens bitterly. And of course capitalism has some communistic elements, because it rewards the incompetent, passive owners (stockholders) of companies through the hard work of the employees. But I’m not here to debate systems. What’s the point? Real life economic problems don’t get solved by the application of theoretical social systems unless there is a terrible price paid, usually in lost human freedom or in famine or war. Real problems get solved by attacking what is going wrong and fixing it. Can this be done with the problems facing America’s economy today? Yes. Will it? The jury’s out on that.
What we do know is that our country doesn’t want to fall into a depression, and many people are working very hard to stop that from happening. A continuing problem seems to be intransigence, though. People and organizations that stubbornly refuse to face the reality that the old deal is done, and a new deal has to happen. The numbers of banks interested in working out foreclosures is very small. Still. The numbers of banks holding second mortgages (home equity loans) on properties in danger of foreclosure that simply refuse to make any deals is way too high. I am not sure if it is the sheer complexity of the banking system that is causing this mess, or just stupidity and short-sightedness, but it’s pretty obvious that the foreclosure crisis is getting worse, not better. We have to solve this, because land is real. Money is not. Once we stabilize land values, the rest of our economy will calm down.
All the media people running around and squawking about the economy should chill. Our stock market runs on rumor, on chatter. Right now, faced with the doomsday scenarios about our big automobile companies, the stock market is miserable and many healthy companies have seen their stocks tank. It doesn’t make sense. It’s sheer fear. And possibly some speculators running away. The talking heads on television and their blog-and-website counterparts of the Internet all get a charge out of talking negatively about the economy. But now so many of them are freaked out about the stock market that I am somewhat freaked out myself. Sure, everything can fall apart. But will it? Should I take their doomsday talk seriously? They keep talking and talking. But that’s the problem. They’re observers; they aren’t directly involved in solving our country’s economic problems. Once I turned off the television, I realized that I don’t think everything is going to fall apart. Not with so many people trying to make sure it doesn’t.
But let’s take the worst case scenario for a second. For Brazil in the 1990s, or Japan, things went seriously downhill. There was inflation. And falling values to all sorts of capitalist property. It was a mess. But they’ve climbed up from that point. Maybe not back to where they had been in the money markets. But when I visited Japan a year ago, the place looked solvent. People dressed well. The stores were full of people buying expensive items. There were plenty of fish in the market. So even if the US completely screws up our money economy and our land economy, I have to believe that some day, we will recover. Why? Because we’ve got land, we’ve got resources, we’ve got a healthy, educated work force, and we’ve got drive. We also have the Internet and a lot of bright ideas. I say the future is going to be good. We just have to stop being so scared.
A decade ago, a lot of Americans indulged in millennial fears. But I was too busy to stockpile water and toilet paper for the coming of the apocalypse. Since then, we’ve had 9/11, and more fears, some of them justified but most of them not. And now this, the economic meltdown. Is it finally time to stock up on toilet paper and bottled water? Get more shells for the shotgun so we can live on deer meat? I don’t think so. This country isn’t falling apart any day soon. So let’s not freak out.
Tuesday, November 18, 2008
Getting Ready for a Depression
I read an interesting article in the Washington Post last month by Paul Farhi that claimed that the Great Depression did not happen in the instantaneous manner we’ve always been told. That the stock market actually improved after the crash and―a long-cherished image―stock brokers did not leap out of windows en masse. The scary part is that a couple of years down the line, the country did sink into a mess of 25% unemployment.
Someone I know is about to lose his job. (Citicorp has just announced it is laying off 50,000+ people.) He has a nonworking wife whose own career never got started because they had two children, both of whom are still very young. If he can find a new job at a comparable salary, nothing has to change. If he can’t, but his wife can finally start the career for which she trained, some things will change but life should be all right. But what if neither of them can find a job that replaces his current salary? Or what if it takes a year or even two years before that job is found? Or what if they both have to work because each has to accept a very low salary? Everything about their life will have to change. The kids will have to go into daycare. The family might lose their house before they get enough replacement income. They might have to move to an area where there are more opportunities for both of them. Or where a relative can perform free child care. And more.
Thus job loss per se isn’t the only situation we have to fear in the coming months and years of finally-admitted recession and possible depression. Taking a big hit financially and changes in our living arrangements are very likely, too. The better we prepare ourselves for those possibilities, the easier it will be to accept necessary changes.
What we all need right now is an emergency game plan, one that is flexible enough to accommodate several possible situations. The plan should be based on the amount of living expenses we have in savings. Sure, Citicorp will probably pay severance. But some companies that have filed for bankruptcy have not, so be cautious about counting on severance as a significant part of your carrying costs before finding a new job. And unemployment compensation almost never pays enough to replace a good income.
The emergency game plan should be a timetable keyed the to the amount of our rainy day savings. In the past, personal finance experts urged us to keep three to six months of living expenses in savings. Suze Orman is now telling people to have eight months or more in savings. She’s a smart woman. She’s assuming it will take longer than before to find another job. Let’s say for argument’s sake that we have eight months of expenses in savings. And it takes a year to find a new job. We’d be in big trouble.
The plan should be based on the money we have, not on our hopes for regaining income. The timing of our actions also has to be based on the money we have or can access, perhaps by cutting expenses, but also by adding a night job, or getting another family member back to work, or by selling big items such as a second car or a tricked out racing bike.
Here’s a sample game plan based on having eight months of living expenses in rainy day savings:
• Month One: Job loss, followed by immediate efforts to obtain a similar level of employment with no change in location. Cut down on daily expenses. Postpone all big ticket expenses.
• Month Two: Drastic permanent cuts in family plans for vacations, presents, large future expenses such as private schools. Explore local housing market and consider selling current house. Month Three: Widen the job search to other states and other kinds of work locally. Check out housing costs and lifestyle indicators in other states, and lower-cost housing locally. Find a real estate agent.
• Month four: Weigh alternatives of lower salary locally coupled with local move, or relocating to another state. Sell and donate excess possessions. Ready home for sale.
• Month five: Hold yard sales to eliminate all excess possessions and empty any storage. Put house up for sale.
• Month six: Hold open houses. Find a potential new home and interview movers.
• Month seven: Pack. Lower price of house by 15%.
• Month eight: Start new job. Close on house and move.
Sounds draconian, doesn’t it? But this plan assumes some key positives, such as that you will find a job by the time your money runs out, and that it will only take you three to four months to sell your home. It also assumes you’re selling in the high season for home sales, which may not be your situation. And you’re only lowering your price by 15% after 90 days, which in some markets may not be enough to get the house sold.
Is the only answer to unemployment to pack up and leave? No. We could add into the timetable:
• Month One: Sign up for courses geared to give you additional expertise or qualify you for a new career path. Register for state unemployment assistance in resume writing, network, interviewing, and more.
• Month Two: Network with classmates and professors to enhance employment leads.
• Month Three: Rearrange family living patterns to allow a nonworking spouse to work, or a teenager to get a part-time job or a scholarship.
• Month Four: Join local associations related to your field of expertise and arrange to be a speaker before the group. Teach adult education classes in your field of expertise. Network.
• Month Five: Rent out a room. If it won’t lower unemployment compensation benefits, get a bridge job as a night watchman, weekend pizza deliverer, store stocker, etc.
• Month Six: Sell excess possessions on eBay. Volunteer, and network as you do.
• Month Seven: Sell the second car. Take and teach more courses, and repeat all the networking steps.
• Month Eight: Start new job. Re-start rainy day savings.
Some people would also recommend cracking open a 401(k) in a desperate measure to keep funding your pre-unemployment life, but your retirement savings should remain untouched. You’re going to need every penny of your retirement savings later in life, when you’re likely to be even more desperate than you are today. Unless you have good reason to believe that you will be hired within a few months (for instance, when a new fiscal year budget opens up some jobs), there usually is little point in emptying your pockets only to delay the inevitable. If you’re not going to find another good job, or one in this area, and you can’t get another family member to pick up enough of your lost income, and you can’t create some other income-producing scenario such as renting a room or selling your garage full of classic cars one at a time, you should seriously consider downsizing your life.
Do you see how the longer you remain unemployed, the more you have to change your life? If you can find a new job in three months, you won’t have to sell your house or ask your spouse to work. If it takes you six months to find a job, maybe the income hit you have already taken makes selling your house and moving locally the smart thing to do. If it takes a year to find a new job, maybe you have already maxed out your credit cards paying day-to-day expenses, and your house is in danger of foreclosure, and you have to move hundreds of miles to take the only job you got offered. But what is the alternative? Santa Claus isn’t delivering great new employment opportunities in his sleigh, and winning the lottery isn’t happening, so you will have to take action.
Recognize which way the wind is blowing. If your area of employment has taken a big hit locally and there are thousands of people with your skills suddenly out of work, it may be sensible to plan moving to an area where there is less competition. You can find this out by asking job interviewers how many applications they received. If they received thousands, you know you’re up against it. Still, you got the interview, so maybe you will win out. I’m not advocating giving up hope. But I want you to have a plan.
Someone I know is about to lose his job. (Citicorp has just announced it is laying off 50,000+ people.) He has a nonworking wife whose own career never got started because they had two children, both of whom are still very young. If he can find a new job at a comparable salary, nothing has to change. If he can’t, but his wife can finally start the career for which she trained, some things will change but life should be all right. But what if neither of them can find a job that replaces his current salary? Or what if it takes a year or even two years before that job is found? Or what if they both have to work because each has to accept a very low salary? Everything about their life will have to change. The kids will have to go into daycare. The family might lose their house before they get enough replacement income. They might have to move to an area where there are more opportunities for both of them. Or where a relative can perform free child care. And more.
Thus job loss per se isn’t the only situation we have to fear in the coming months and years of finally-admitted recession and possible depression. Taking a big hit financially and changes in our living arrangements are very likely, too. The better we prepare ourselves for those possibilities, the easier it will be to accept necessary changes.
What we all need right now is an emergency game plan, one that is flexible enough to accommodate several possible situations. The plan should be based on the amount of living expenses we have in savings. Sure, Citicorp will probably pay severance. But some companies that have filed for bankruptcy have not, so be cautious about counting on severance as a significant part of your carrying costs before finding a new job. And unemployment compensation almost never pays enough to replace a good income.
The emergency game plan should be a timetable keyed the to the amount of our rainy day savings. In the past, personal finance experts urged us to keep three to six months of living expenses in savings. Suze Orman is now telling people to have eight months or more in savings. She’s a smart woman. She’s assuming it will take longer than before to find another job. Let’s say for argument’s sake that we have eight months of expenses in savings. And it takes a year to find a new job. We’d be in big trouble.
The plan should be based on the money we have, not on our hopes for regaining income. The timing of our actions also has to be based on the money we have or can access, perhaps by cutting expenses, but also by adding a night job, or getting another family member back to work, or by selling big items such as a second car or a tricked out racing bike.
Here’s a sample game plan based on having eight months of living expenses in rainy day savings:
• Month One: Job loss, followed by immediate efforts to obtain a similar level of employment with no change in location. Cut down on daily expenses. Postpone all big ticket expenses.
• Month Two: Drastic permanent cuts in family plans for vacations, presents, large future expenses such as private schools. Explore local housing market and consider selling current house. Month Three: Widen the job search to other states and other kinds of work locally. Check out housing costs and lifestyle indicators in other states, and lower-cost housing locally. Find a real estate agent.
• Month four: Weigh alternatives of lower salary locally coupled with local move, or relocating to another state. Sell and donate excess possessions. Ready home for sale.
• Month five: Hold yard sales to eliminate all excess possessions and empty any storage. Put house up for sale.
• Month six: Hold open houses. Find a potential new home and interview movers.
• Month seven: Pack. Lower price of house by 15%.
• Month eight: Start new job. Close on house and move.
Sounds draconian, doesn’t it? But this plan assumes some key positives, such as that you will find a job by the time your money runs out, and that it will only take you three to four months to sell your home. It also assumes you’re selling in the high season for home sales, which may not be your situation. And you’re only lowering your price by 15% after 90 days, which in some markets may not be enough to get the house sold.
Is the only answer to unemployment to pack up and leave? No. We could add into the timetable:
• Month One: Sign up for courses geared to give you additional expertise or qualify you for a new career path. Register for state unemployment assistance in resume writing, network, interviewing, and more.
• Month Two: Network with classmates and professors to enhance employment leads.
• Month Three: Rearrange family living patterns to allow a nonworking spouse to work, or a teenager to get a part-time job or a scholarship.
• Month Four: Join local associations related to your field of expertise and arrange to be a speaker before the group. Teach adult education classes in your field of expertise. Network.
• Month Five: Rent out a room. If it won’t lower unemployment compensation benefits, get a bridge job as a night watchman, weekend pizza deliverer, store stocker, etc.
• Month Six: Sell excess possessions on eBay. Volunteer, and network as you do.
• Month Seven: Sell the second car. Take and teach more courses, and repeat all the networking steps.
• Month Eight: Start new job. Re-start rainy day savings.
Some people would also recommend cracking open a 401(k) in a desperate measure to keep funding your pre-unemployment life, but your retirement savings should remain untouched. You’re going to need every penny of your retirement savings later in life, when you’re likely to be even more desperate than you are today. Unless you have good reason to believe that you will be hired within a few months (for instance, when a new fiscal year budget opens up some jobs), there usually is little point in emptying your pockets only to delay the inevitable. If you’re not going to find another good job, or one in this area, and you can’t get another family member to pick up enough of your lost income, and you can’t create some other income-producing scenario such as renting a room or selling your garage full of classic cars one at a time, you should seriously consider downsizing your life.
Do you see how the longer you remain unemployed, the more you have to change your life? If you can find a new job in three months, you won’t have to sell your house or ask your spouse to work. If it takes you six months to find a job, maybe the income hit you have already taken makes selling your house and moving locally the smart thing to do. If it takes a year to find a new job, maybe you have already maxed out your credit cards paying day-to-day expenses, and your house is in danger of foreclosure, and you have to move hundreds of miles to take the only job you got offered. But what is the alternative? Santa Claus isn’t delivering great new employment opportunities in his sleigh, and winning the lottery isn’t happening, so you will have to take action.
Recognize which way the wind is blowing. If your area of employment has taken a big hit locally and there are thousands of people with your skills suddenly out of work, it may be sensible to plan moving to an area where there is less competition. You can find this out by asking job interviewers how many applications they received. If they received thousands, you know you’re up against it. Still, you got the interview, so maybe you will win out. I’m not advocating giving up hope. But I want you to have a plan.
Saturday, November 15, 2008
Stock Market Morass
When Dylan Ratigan of CNBC’s Fast Money jokingly suggested new names for the daily stock market show he hosts, including “Where the Heck is My Money?” his producer, John Molloy, evidently was not amused. Gallows humor is not proper for a serious finance program, I guess.
But I was amused, because in this market, a nonprofessional investor such as myself is utterly confused and likely to be asking exactly that question. I mean, what’s going on? Why have stocks in solid companies fallen dramatically when there is nothing wrong with those companies? I did finally look at my 401(k) statement, and somehow my fund manager(s) had lost money on bonds. How the heck do you lose money on bonds?
I don’t know. I don’t understand the stock market, except to know that it has always been a money market run by male gossips. Dignified by its association with big profits, but basically, a silly game of telephone. Still, as long as my future and the futures of millions of Americans weren’t likely to be monumentally messed up by their trading shenanigans, I didn’t care. But I kept away from actively trading myself because I knew I was ignorant.
Now, more and more, I am hearing that it is up to me to educate myself deeply in the stock market’s doings, and eventually to seize active control of my retirement savings and do trades myself. Even day trade, for gosh sakes. Buy stuff at 3:30 PM, just after all the hedge fund managers dump their stocks and everything takes a dip. Or something like that. That freaks me out. Not only is it far more involvement than I personally want with a market fueled by rumor and false expectations, but it’s a lot of hard work. And I’ve got other things to do with my life, other work to do.
But more than one of the endless talk shows about money that I have watched in the past month have begun promulgating the idea that the era of “buy and hold” is over. That we all stand to lose our retirement money if we don’t become active traders. Great. First they force us (or was it lure us?) into the stock market via 401(k)s and lots of dire talk about how ordinary savings can never match inflation. And now they’re pointing out that anyone who bought and held as I did from 2001 to 2008 made no money at all even before this latest cataclysm. So what am I doing in the stock market? As Dylan Ratigan said, “Where the heck is my money?”
It’s sad, really. During the tech boom in the 1990s, we saw people around us becoming wealthy overnight. We all wanted to get in on the action, and some of us did. The ones who took their profits and sold out, and then put that money into something secure (and I do wonder what that would have been) managed to keep their wealth. Meanwhile, others saw their shares of tech stocks become worthless. I remember older guys at my office showing me their 401(k) statements in 2001, telling me how they’d lost a third of their value. At that point I didn’t even have a 401(k), so I had scant sympathy for them. I figured they had time to recoup. And anyway, they were way ahead of me. But that was before Enron and WorldComm and other disasters, which also slashed at people’s retirement savings. Finally, the market started climbing again. Things got better. The funds of my fledgling 401(k) were showing a steady profit, and my retirement savings were compounding at last. And here we are again. That same scenario, just a different cause. Where the heck is my money?
Most people with 401(k)s do not want to become stock market traders. All we want is a sure thing. And the stock market has no sure things anymore. The insiders themselves say so. Then what am I doing in the market at all? I lost money on bonds, for heaven’s sake. How inept can these professional fund managers be? My 401(k) was supposed to be my escalator, my personal hedge against inflation. It’s not going to be after all. I’ll have to depend on Social Security for income growth. Meanwhile, my pitiful little IRA CDs at the bank are still intact and have been compounding interest all this while. Are they keeping up with inflation? Do I care? At least they haven’t lost a third of their value twice, or filled me with false hope.
The stock market always seemed silly to me. Now it seems both silly and dangerous, and to my mind that equals stupid. The only question that remains is whether I should stay in the market for another seven years, hoping that I can eventually sell my stock for the original dollar amount I invested in 2001. Pitiful.
But I was amused, because in this market, a nonprofessional investor such as myself is utterly confused and likely to be asking exactly that question. I mean, what’s going on? Why have stocks in solid companies fallen dramatically when there is nothing wrong with those companies? I did finally look at my 401(k) statement, and somehow my fund manager(s) had lost money on bonds. How the heck do you lose money on bonds?
I don’t know. I don’t understand the stock market, except to know that it has always been a money market run by male gossips. Dignified by its association with big profits, but basically, a silly game of telephone. Still, as long as my future and the futures of millions of Americans weren’t likely to be monumentally messed up by their trading shenanigans, I didn’t care. But I kept away from actively trading myself because I knew I was ignorant.
Now, more and more, I am hearing that it is up to me to educate myself deeply in the stock market’s doings, and eventually to seize active control of my retirement savings and do trades myself. Even day trade, for gosh sakes. Buy stuff at 3:30 PM, just after all the hedge fund managers dump their stocks and everything takes a dip. Or something like that. That freaks me out. Not only is it far more involvement than I personally want with a market fueled by rumor and false expectations, but it’s a lot of hard work. And I’ve got other things to do with my life, other work to do.
But more than one of the endless talk shows about money that I have watched in the past month have begun promulgating the idea that the era of “buy and hold” is over. That we all stand to lose our retirement money if we don’t become active traders. Great. First they force us (or was it lure us?) into the stock market via 401(k)s and lots of dire talk about how ordinary savings can never match inflation. And now they’re pointing out that anyone who bought and held as I did from 2001 to 2008 made no money at all even before this latest cataclysm. So what am I doing in the stock market? As Dylan Ratigan said, “Where the heck is my money?”
It’s sad, really. During the tech boom in the 1990s, we saw people around us becoming wealthy overnight. We all wanted to get in on the action, and some of us did. The ones who took their profits and sold out, and then put that money into something secure (and I do wonder what that would have been) managed to keep their wealth. Meanwhile, others saw their shares of tech stocks become worthless. I remember older guys at my office showing me their 401(k) statements in 2001, telling me how they’d lost a third of their value. At that point I didn’t even have a 401(k), so I had scant sympathy for them. I figured they had time to recoup. And anyway, they were way ahead of me. But that was before Enron and WorldComm and other disasters, which also slashed at people’s retirement savings. Finally, the market started climbing again. Things got better. The funds of my fledgling 401(k) were showing a steady profit, and my retirement savings were compounding at last. And here we are again. That same scenario, just a different cause. Where the heck is my money?
Most people with 401(k)s do not want to become stock market traders. All we want is a sure thing. And the stock market has no sure things anymore. The insiders themselves say so. Then what am I doing in the market at all? I lost money on bonds, for heaven’s sake. How inept can these professional fund managers be? My 401(k) was supposed to be my escalator, my personal hedge against inflation. It’s not going to be after all. I’ll have to depend on Social Security for income growth. Meanwhile, my pitiful little IRA CDs at the bank are still intact and have been compounding interest all this while. Are they keeping up with inflation? Do I care? At least they haven’t lost a third of their value twice, or filled me with false hope.
The stock market always seemed silly to me. Now it seems both silly and dangerous, and to my mind that equals stupid. The only question that remains is whether I should stay in the market for another seven years, hoping that I can eventually sell my stock for the original dollar amount I invested in 2001. Pitiful.
Tuesday, October 28, 2008
Who Is Going to Bail You and Me Out?
What are we expecting, and what will actually happen?
1) The banks will get lots of money.
2) The banks will lend it to us, keeping our houses from being foreclosed.
3) The banks will lower credit card finance charges and make it easier to pay off balances without incurring penalties and harsh rate hikes.
Number 1 will come true. Even now, the banks are being given money by the Federal government, in fact, being forced to accept it.
Number 2 will come true for some people, but a lot will somehow not qualify or get caught at the wrong moment. A few people will even fall for yet another housing scam, and find themselves even worse off than before.
Number 3 will only happen if we the public put pressure on legislators to insist that banks who take a bailout also knuckle under and revamp their usurious credit card rates and practices. Banks are living on credit card finance charges and penalties. We are their huge profit center. They won’t give us up easily, and they will lobby not to let us get away with any write-down of our personal debts. Meanwhile, banks will get millions of dollars in write-downs of their own debts.
In this unfair situation, what are we to do? We should press our legislators to reenact usury laws to cap the rates we can be charged. But meanwhile, until Congress finally acts to protect consumers—thus warding off the third, currently unacknowledged but looming credit crisis of our economy—we need to protect ourselves from getting caught in the squeeze. I know someone who missed a payment and then was assessed 67% in finance charges. It could happen to you.
Here are some tips on how to maximize the value of your credit card payments:
1) Currently, credit card bills get mailed very late in the billing cycle, so we have only a few days to put together the money to pay the total on time. It’s getting harder and harder to trust that the credit card companies will admit that a mailed payment arrived on time. The US Mail is not as slow as the credit card companies claim. Fight back by establishing a free online method of moving money directly from your bank to the credit card company. And then check on your running total weekly, so you can begin to gather up the needed funds in advance. As the new total edges higher, seeing it will remind you to slow down your spending, too.
2) If you usually pay in full, pay in pieces during the month. Then you’re always sure of having paid the minimum on time, thus avoiding any late fees or penalties.
3) If you run a balance on the account, use this early-pay method to lower your finance charge total. The charge is calculated based on your average daily balance, which will then be lower as the month progresses, not higher.
4) If the minimum payment is all you can afford, make it work harder for you. As soon as the payment cycle from the previous month closes (your bill due date), make your next minimum payment. It’ll reduce your daily balance every day of the billing cycle. If you don’t have the full minimum that early in the month, pay what you can as you receive it. It’ll still help lower the bite.
The psychological advantage to paying your credit card bill online in pieces is that you will be continuously aware of the coming total long before you receive a mailed bill, and you will be handling it according to your schedule, not the credit card company’s. That puts more power in your hands. The bill is never a surprise, and you have a strategy to ensure that you never make a late or insufficient payment.
1) The banks will get lots of money.
2) The banks will lend it to us, keeping our houses from being foreclosed.
3) The banks will lower credit card finance charges and make it easier to pay off balances without incurring penalties and harsh rate hikes.
Number 1 will come true. Even now, the banks are being given money by the Federal government, in fact, being forced to accept it.
Number 2 will come true for some people, but a lot will somehow not qualify or get caught at the wrong moment. A few people will even fall for yet another housing scam, and find themselves even worse off than before.
Number 3 will only happen if we the public put pressure on legislators to insist that banks who take a bailout also knuckle under and revamp their usurious credit card rates and practices. Banks are living on credit card finance charges and penalties. We are their huge profit center. They won’t give us up easily, and they will lobby not to let us get away with any write-down of our personal debts. Meanwhile, banks will get millions of dollars in write-downs of their own debts.
In this unfair situation, what are we to do? We should press our legislators to reenact usury laws to cap the rates we can be charged. But meanwhile, until Congress finally acts to protect consumers—thus warding off the third, currently unacknowledged but looming credit crisis of our economy—we need to protect ourselves from getting caught in the squeeze. I know someone who missed a payment and then was assessed 67% in finance charges. It could happen to you.
Here are some tips on how to maximize the value of your credit card payments:
1) Currently, credit card bills get mailed very late in the billing cycle, so we have only a few days to put together the money to pay the total on time. It’s getting harder and harder to trust that the credit card companies will admit that a mailed payment arrived on time. The US Mail is not as slow as the credit card companies claim. Fight back by establishing a free online method of moving money directly from your bank to the credit card company. And then check on your running total weekly, so you can begin to gather up the needed funds in advance. As the new total edges higher, seeing it will remind you to slow down your spending, too.
2) If you usually pay in full, pay in pieces during the month. Then you’re always sure of having paid the minimum on time, thus avoiding any late fees or penalties.
3) If you run a balance on the account, use this early-pay method to lower your finance charge total. The charge is calculated based on your average daily balance, which will then be lower as the month progresses, not higher.
4) If the minimum payment is all you can afford, make it work harder for you. As soon as the payment cycle from the previous month closes (your bill due date), make your next minimum payment. It’ll reduce your daily balance every day of the billing cycle. If you don’t have the full minimum that early in the month, pay what you can as you receive it. It’ll still help lower the bite.
The psychological advantage to paying your credit card bill online in pieces is that you will be continuously aware of the coming total long before you receive a mailed bill, and you will be handling it according to your schedule, not the credit card company’s. That puts more power in your hands. The bill is never a surprise, and you have a strategy to ensure that you never make a late or insufficient payment.
Saturday, October 18, 2008
Have You Checked Your 401 (k) Lately?
Well, don’t. At least, don’t check the total. You won’t be happy. Instead, look at your asset allocation. That’s the page that shows whether all of your 401 (k) is in aggressive growth stocks or in conservative funds or even in bonds. Typically, it will show a mixture. Your job now is to be your 401 (k)’s arbiter of how much should be in which kind of investment.
No one else can tell you what mixture of risk and assurance will allow you to sleep at night. But before you rashly sell and buy, consider your own personal track record when it comes to risk. Have you tended in the past to go whole hog for iffy stocks? And has that worked for you? Or is your style to lock all your money into extremely safe, low-growth stocks or no-growth bonds? Has your capital merely crept along, barely keeping pace with inflation? Is that good enough for you? You are the only one who can decide if you are happy with the trend of your investments. But you do need to know who you are as an investor. And this is something you should know regardless of the current state of the stock market or the economy.
Has your understanding of the market, especially of ups and downs, been proved faulty? Years ago, mine was, and I took that lesson to heart. I had been given some stock in a big corporation. It made a large investment in a product line that tanked in a very visible fashion (think Classic Coke or the Edsel), and its stock took a beating. So I sold it. Big mistake. A company that large commands so much talent and market presence that it soon had another wildly successful product. The stock split, and then split again. And it has been on an upward trend ever since, although I am sure it has had periods of being down a bit, too. I haven’t been looking carefully, because it reminds me of how I lost a huge amount of profit. All because I thought a momentary down was permanent. In these extremely volatile times, you need to consider that lesson. Some businesses are going to do well in the future regardless of current craziness. Others are headed for oblivion. If you don’t have enough knowledge to forecast which is which, then your choice is to educate yourself or let a fund manager do the worrying.
I could have bought stock in that company again, and participated in the rest of its good times. But being stubborn and stupid about a mistake is a common human failing. It even has a behavioral economics name, the disposition effect. That’s when we tend to throw good money after bad, even though we know we should cut our losses. I’ve talked about it on this blog in the past, although not by name, when it comes to being stubborn about staying in a house you can’t afford. Turns out we’re all doing this all the time in all areas of our lives. That’s probably why your friend took so long to dump that loser she dated.
I tried again with the stock market, years later. I bought an index fund. But I hadn’t been paying attention to the trend of the market, which was down. It immediately lost one third of its value. So did everything else in the stock market, of course, but I felt like an idiot. Because I was. The safest thing to do if you aren’t an expert on the stock market is to hire an expert to work for you. Individual brokers haven’t usually been the answer for the modest investor; mutual funds have. With a mutual fund, you spread your risk because you buy a defined mixture of assets, and then depend on the fund manager to keep buying and selling the right assets at the right moment. Still, in a precipitously down trending market, you’ll initially lose money.
I’ve previously advocated putting money into bank savings accounts or CDs, and I still do. It still makes sense to protect your principal. The problem with utterly safe bank investments and bonds is that they don’t grow your principal. So you have to decide what you are saving for. And this is where it gets sticky. If you are saving to pay your mortgage, car payment, tuition payment , and other set obligations for the six months to a year it might take you to find a new job if you lose your current one, a bank is the best place for the money. Why? Because as I have said before, even the deflated value of money in the bank still pays the original percentage of a fixed obligation. If the mortgage is $2,000 a month, it’s still that a year later. So if you have $24,000 in the bank to pay your mortgage for a year, you’re fine. But you don’t necessarily want to have two or three years of payments sitting in the bank not keeping pace with inflation and not growing. And that’s why people turn to the stock market.
What you want to think about is how long you have to grow the bulk of your savings as investment, versus when you want to draw on that money. And that’s unfortunately where the current stock market mess is giving people anxiety attacks. Because some of us need to retire very soon, or we need to draw on education accounts to pay for college very soon. As Jim Cramer of the TV show “Mad Money” said recently, if you need the money in the next five years, pull it out. He has been credited and vilified for saying this, because the stock market went even lower after he said it. Is the advice of one man that influential? Possibly, in a time of general panic. But then why did Warren Buffett’s three billion dollar investment in GE stock not send every investor in the world to buy GE? Incidentally, Cramer put his money where his mouth was. He sold stock from his elder daughter’s college fund because she’s in college now. He’s holding the stock in his younger daughter’s college fund because she has several years to go before college. My own personal decision has been to leave all my investments in the stock market as is. But then my own 401 (k) and SEP IRAs are so small that they’re not particularly significant to my future. I still have hopes that I can grow them so they could become substantial, which is why I am leaving them in.
Most of us are familiar with the concept of dollar cost averaging. This is a great time to buy stocks cheaply. So keep shoveling all you can into your 401 (k), acquiring more assets in the proportions that make you feel comfortable. Buy more bonds, for instance. Your research should not be on individual stocks unless you have an area of expertise that allows you to understand how a certain field trends. I have a relative who specializes in railroad stocks. As a lifelong railroad fan, he has accumulated a vast amount of knowledge about the assets of individual railroads and he knows when a certain stock is undervalued. But he also knows when to take his profit and sell, thus avoiding the disposition effect. If you don’t know that—and I certainly have proof I that don’t—then individual stocks are not the investment for you.
Instead, research funds and fund managers. You want a fund, or a mixture of funds, that gives you a fighting chance to cash in on every stock that is underpriced in today’s market (and there are plenty). But you don’t want or need the heartache of knowing their individual ups and downs. That way lies madness. Your fund should include rebalancing on a regular basis, whether the stock market is in crisis or not. What is a comfortable risk profile when you are 30 is not the same as when you are 60.
And stop checking your 401(k).
Well, don’t. At least, don’t check the total. You won’t be happy. Instead, look at your asset allocation. That’s the page that shows whether all of your 401 (k) is in aggressive growth stocks or in conservative funds or even in bonds. Typically, it will show a mixture. Your job now is to be your 401 (k)’s arbiter of how much should be in which kind of investment.
No one else can tell you what mixture of risk and assurance will allow you to sleep at night. But before you rashly sell and buy, consider your own personal track record when it comes to risk. Have you tended in the past to go whole hog for iffy stocks? And has that worked for you? Or is your style to lock all your money into extremely safe, low-growth stocks or no-growth bonds? Has your capital merely crept along, barely keeping pace with inflation? Is that good enough for you? You are the only one who can decide if you are happy with the trend of your investments. But you do need to know who you are as an investor. And this is something you should know regardless of the current state of the stock market or the economy.
Has your understanding of the market, especially of ups and downs, been proved faulty? Years ago, mine was, and I took that lesson to heart. I had been given some stock in a big corporation. It made a large investment in a product line that tanked in a very visible fashion (think Classic Coke or the Edsel), and its stock took a beating. So I sold it. Big mistake. A company that large commands so much talent and market presence that it soon had another wildly successful product. The stock split, and then split again. And it has been on an upward trend ever since, although I am sure it has had periods of being down a bit, too. I haven’t been looking carefully, because it reminds me of how I lost a huge amount of profit. All because I thought a momentary down was permanent. In these extremely volatile times, you need to consider that lesson. Some businesses are going to do well in the future regardless of current craziness. Others are headed for oblivion. If you don’t have enough knowledge to forecast which is which, then your choice is to educate yourself or let a fund manager do the worrying.
I could have bought stock in that company again, and participated in the rest of its good times. But being stubborn and stupid about a mistake is a common human failing. It even has a behavioral economics name, the disposition effect. That’s when we tend to throw good money after bad, even though we know we should cut our losses. I’ve talked about it on this blog in the past, although not by name, when it comes to being stubborn about staying in a house you can’t afford. Turns out we’re all doing this all the time in all areas of our lives. That’s probably why your friend took so long to dump that loser she dated.
I tried again with the stock market, years later. I bought an index fund. But I hadn’t been paying attention to the trend of the market, which was down. It immediately lost one third of its value. So did everything else in the stock market, of course, but I felt like an idiot. Because I was. The safest thing to do if you aren’t an expert on the stock market is to hire an expert to work for you. Individual brokers haven’t usually been the answer for the modest investor; mutual funds have. With a mutual fund, you spread your risk because you buy a defined mixture of assets, and then depend on the fund manager to keep buying and selling the right assets at the right moment. Still, in a precipitously down trending market, you’ll initially lose money.
I’ve previously advocated putting money into bank savings accounts or CDs, and I still do. It still makes sense to protect your principal. The problem with utterly safe bank investments and bonds is that they don’t grow your principal. So you have to decide what you are saving for. And this is where it gets sticky. If you are saving to pay your mortgage, car payment, tuition payment , and other set obligations for the six months to a year it might take you to find a new job if you lose your current one, a bank is the best place for the money. Why? Because as I have said before, even the deflated value of money in the bank still pays the original percentage of a fixed obligation. If the mortgage is $2,000 a month, it’s still that a year later. So if you have $24,000 in the bank to pay your mortgage for a year, you’re fine. But you don’t necessarily want to have two or three years of payments sitting in the bank not keeping pace with inflation and not growing. And that’s why people turn to the stock market.
What you want to think about is how long you have to grow the bulk of your savings as investment, versus when you want to draw on that money. And that’s unfortunately where the current stock market mess is giving people anxiety attacks. Because some of us need to retire very soon, or we need to draw on education accounts to pay for college very soon. As Jim Cramer of the TV show “Mad Money” said recently, if you need the money in the next five years, pull it out. He has been credited and vilified for saying this, because the stock market went even lower after he said it. Is the advice of one man that influential? Possibly, in a time of general panic. But then why did Warren Buffett’s three billion dollar investment in GE stock not send every investor in the world to buy GE? Incidentally, Cramer put his money where his mouth was. He sold stock from his elder daughter’s college fund because she’s in college now. He’s holding the stock in his younger daughter’s college fund because she has several years to go before college. My own personal decision has been to leave all my investments in the stock market as is. But then my own 401 (k) and SEP IRAs are so small that they’re not particularly significant to my future. I still have hopes that I can grow them so they could become substantial, which is why I am leaving them in.
Most of us are familiar with the concept of dollar cost averaging. This is a great time to buy stocks cheaply. So keep shoveling all you can into your 401 (k), acquiring more assets in the proportions that make you feel comfortable. Buy more bonds, for instance. Your research should not be on individual stocks unless you have an area of expertise that allows you to understand how a certain field trends. I have a relative who specializes in railroad stocks. As a lifelong railroad fan, he has accumulated a vast amount of knowledge about the assets of individual railroads and he knows when a certain stock is undervalued. But he also knows when to take his profit and sell, thus avoiding the disposition effect. If you don’t know that—and I certainly have proof I that don’t—then individual stocks are not the investment for you.
Instead, research funds and fund managers. You want a fund, or a mixture of funds, that gives you a fighting chance to cash in on every stock that is underpriced in today’s market (and there are plenty). But you don’t want or need the heartache of knowing their individual ups and downs. That way lies madness. Your fund should include rebalancing on a regular basis, whether the stock market is in crisis or not. What is a comfortable risk profile when you are 30 is not the same as when you are 60.
And stop checking your 401(k).
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