Thursday, October 02, 2008

What To Do?

Over the last few days, a few readers have asked for advice on how to weather the tough economy we're facing right now. This is the kind of question I'm often reluctant to answer. Remember that I'm not a licensed financial advisor and I don't play one on TV, on stage, or in puppet shows (yet).

But here's what I think, and what I'm trying to do myself:

Don't cash out. If there was ever a good time to do that, we're past it now. Remember the old rule about buying low and selling high. Yes, today's lows could go lower, but chances are that they'll go back up. If you have a long window to retirement, now is probably a good time to be putting money into your 401k and getting some bargain share prices.

Invest carefully. Having said the above, I personally would not recommend buying individual stocks right now. I also wouldn't be buying shares in anything that invested heavily in the finance sector. This is just my personal opinion and others may differ, but the general point is that if you aren't an investing expert, now is probably not the time to dive in with wild experimental bets! Also, you might want to look carefully at what funds you have in your 401k right now and make sure you are still comfortable directing contributions in the same way.

Live carefully. Now is a good time to think about your priorities and make sure your spending aligns with them. If you're allowing yourself a lot of treats and luxuries, you might want to refocus your spending and think about things you can do to protect yourself. Could you take a class that will enhance your career prospects? Should you focus on ways you can supplement your income by an extra job or selling things on Ebay? Should you postpone that big vacation or redecorating the house? This relates to the next point:

Save. Whatever else you are doing and how the market is going, the most important thing is to live within your means. Now isn't a good time to let your discipline slip and think it will be okay because you'll get a raise next year, or be able to carry a higher credit card debt, or be able to sell your house. Saving some portion of your earnings is the only thing you can control, and it is the solid foundation on which to build your financial fortress!

Give. No matter how hard you are hit by economic woes, there is probably someone else out there who is a lot worse off. Think about making some charitable donations, or other ways you can help family, friends, and others in your community who may need it.

Anyone else have any advice to share?


Kady said...

Yes. Before you are investing, you must:

(1) pay off any debt w/ basically higher than 2-3% interest (housing excepted). You're not going to get better returns than that for at least another 18 months. Don't throw money away by paying interest.

(2) make sure you have that 6-8 months emergency fund and make sure it's liquid. Short term CDs/bank deposits, because even MMFs are not safe right now. Make sure the bank is FDIC insured.

Anonymous said...

I trade for a living. I'll tell you this, if you are down 50% it will take you 10 years or more to recover. Sell all your stocks now. This ship is going down another 10% in the next first weeks. Buy and hold is what the industry tells you to keep making money from you in a bear market. Don't listen to those a-holes, preservation of capital is the most important thing to do. Save, because if your company relies on credit of any kind to run its day to day operations which is most businesses out there, most will go belly up. Please don't use CNN or the Nytimes as an information source, they have no idea how bad it is. Do your own research.

Middle Class Hick said...

I don't have all the answers .. I just have to say that you don't freak out. That is what the media wants you to do (no conspiracy, just sensationalism sells papers and puts eyeballs on the screen to see their adverts). Save when you can, keep a emergency fund, don't waste money .. I do this on a daily basis. As for not cashing out, I agree. I am buying stocks. I have invested $2k in the market. When the govt. said they were going to help out freddie and fannie, their stock dived. I bought 2k shares of each at $0.25 a share. It is not trading at $2 a share. 8x profit in two weeks. That is what I call investing carefully as you knew it was going to go up with government backing.

As for giving. Well if you can do it, then do it. I give to goodwill and stuff. I never give money to organizations. Personal preference. I don't feel the intrinsic return from donating time or money for a cause.

As for Anonymous's note .. You can say to sell it all off, and yes it will take a while to recover, but any tax losses or loss of dividends will be worse when you re-invest at the lower price. I say invest more.

Oh well - you have to do what is best for you.

Doctor S said...

I think it is great that you mention that even during these hard times it is still important to give. We may have it bad, but there is always someone else doing worse and in need of our help. Great point.

If there was ever a time to live below your means, now is that time. I stink at it but I am making an even bigger effort to do so now, otherwise I am going to get hit even harder.

I believe in long term investments and that the market will correct itself, most of my investments are retirement 401k engines so I am not going to touch anything and just let time play its course. Great post X.

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midlife slices said...

I actually think it's a good time to buy more stocks. I believe in long term investing and buying at all periods of up and down are a great cost averaging way to sound investing. Just do your homework and buy solid companies.

And for Pete's sake, don't panic and sell. You haven't lost anything unless you sell when it's down.

Also, don't let the media work you into a doom and gloom frenzy. They are putting a blanket of gloom over all of us when in fact I sell real estate in two of areas (Okla & Texas) where home prices are only minimally affected but you wouldn't think this when listening to the talking heads.

Andrew Abraham said...

We have been disussing what does the layman do on the chats on everyone is so confused... there are so many issues out of our control... what about the strength of the US dollar... what about the taxes or inflation from the bailout..what do we do.. the members of my investors place want to hear suggestions

Anonymous said...

anonymous@10/02/2008 1:52 PM:

I concur but doubt you will convince anyone here. I posted in this blog's comments 2 months ago advising the same. See my post (as anonymous@8/12/2008 2:24 AM):