Month: January 2008
‘Housing Crisis,’ ‘Recession,’ ‘Credit Crisis,’ ‘Subprime Loans’ … media buzz words that are pretty hard to ignore as they are a major part of many news stories. Needless to say, the last couple months have been pretty rough for investors. All three major US market indices (Dow, Nasdaq, and S&P 500) are all down close to 10% (or more) just during the first three weeks of 2008 alone. Unfortunately, many people are reacting to the market volatility emotionally rather than rationally …
Fluctuations in the stock market are normal; for investors that can maintain a ‘cool head,’ volatility can present an opportunity as opposed to a cause for concern. In gleaning many recent news articles about everything that has been going on with the market, consider the following:
AVOID EMOTIONAL DECISIONS/MISTAKES.
When people read about market returns (i.e., the S&P 500 has returned an average of 10.3%/year over the past 80 years), many people envision a scenario where investing money will yield a 10% return every year. Wouldn’t that be nice! Amazingly, during those 80 years, on only 6 occasions did the market return the annual average plus or minus 3% (an annual return between 7.3% and 13.3%). Sounds to me like volatility is a normal part of investing … Investing regularly/ automatically every month (in up and down markets) is one of the easiest way to avoid the risk of emotional investing.
AVOID THE URGE TO MICROMANAGE.
Lots of people have the urge to constantly watch the market – this can easily lead to irrational action. A bad day in the market emotionally feels much worse to people than a good day in the market feels good. Looking under a microscope in this manner also makes it much more challenging to maintain a long-term perspective/ strategy.
There are a lot of resources (web, professionals, etc.) available to assist you with this process. Don’t feel like you need to do everything on your own unless you feel comfortable doing so. Get a financial “check up” where someone else can take a look at what you’re doing with your money and offer potential suggestions/ recommendations. Plenty of smart people seek the advice of others – I’m sure you’ve read that everyone believes they are “above average” drivers; obviously everyone isn’t. Similar studies find that investors tend to overrate their skills/knowledge.
In times like this, the value of an emergency fund becomes more apparent. It is wise to have a cushion of income to cover 2-3 months worth of expenses in a “secure” (no risk) account so that if you need money, you aren’t forced to sell assets to meet short-term needs.
Spreading your investments among various types of asset classes, US and non-US, etc. won’t necessarily keep your account from losing value in a down market, but it can help to temper losses. It should be a key part of your investment strategy.
Obviously easier said than done… For individuals with a long-term horizon, keep in mind that there has not been any 15 year window between 1926 and 2006 when the stock market has lost value.
STICK TO YOUR STRATEGY.
Hopefully you had a rational justification for your investment strategy; if so, the key is to stick with that strategy through the ups and downs of the market. Trying to “time” the market (particularly during high levels of volatility) is not a smart move. During the past 10 years (1/1/97 to 12/31/06), despite a lot of market volatility (time frame includes the tech boom as well as bust), the S&P 500 returned an average annual return of 8.4%. If you had missed the ten best days during that time, you would have earned 38% less money; and if you had missed the twenty best days during the decade, you actually would have lost money! Create a strategy and then stick with it.
UNDERSTAND THE RISKS INVOLVED.
Past performance may be comforting, but ultimately, there is no guarantee of anything in the world of investing. Risk is real. Understand those risks PRIOR to investing money. During turbulent times, use it as an opportunity to better understand risk, allocation, and other important aspects of investing so that you can avoid making future costly mistakes. Now is the time to educate yourself, not the time to emotionally react. The OFS section on investing is a great place to begin/ resume the learning process:
I posted earlier this week ('free planning assistance') so I'll be brief …
I wanted to mention two new resources:
* The OFS, in partnership with Tigers Credit Union, will be providing free financial workshops to the MU community every other week during the spring semester. The first workshop will begin next week (W – January 23rd) in the Memorial Union, room S304, and will address issues surrounding the topic of credit (credit reporting/scoring …). The workshops will be held on Wednesdays during the lunch hour (12-1). I will plan on posting the semester schedule next week … [feel free to bring your lunch with you – a light lunch/refreshments will be provided]. There is an open invitation, but an RSVP to firstname.lastname@example.org if you plan to attend is welcomed.
* NEFE (National Endowment for Financial Education) recently developed a website specifically designed to help college-aged students. The resources will provide students with the information and tools necessary to cultivate positive lifelong habits. The web site includes the following resource areas:
– Financial Basics
– Paying for College
– College Life
– The World of Work
You can check out the free resource at: http://cashcourse.org/mizzou
Last week I wrote about free tax assistance programs. Reading through my Kiplinger’s Personal Finance Magazine the other night, I came across what is seemingly becoming an annual event – free financial planning advice … for two days (TUESDAY, JANUARY 15 and FRIDAY, JANUARY 25) Kiplinger’s is working with the NAPFA (National Association of Personal Financial Advisors) Consumer Education Foundation to provide free, objective financial advice for consumers.
NAPFA (http://napfa.org) is the leading professional organization for fee-only financial advisors. Regardless of your current stage of life, this is a great opportunity to jumpstart your financial plan (New Year resolution?) and address questions about retirement savings, estate planning, taxes, insurance, college savings, etc. Last year, more than 12,000 people received assistance. Typically, fee only planners charge an hourly rate of $100 to $250.
Where do you go to get the free assistance?
*CALL – 888-919-2345
*LIVE ONLINE DISCUSSION – http://www.kiplinger.com/links/jumpstart
*AVAILABILITY – 1/15/08 & 1/25/08 – (9:00am – 6:00pm EST)
It’s that time of year again. Once again, numerous resources are available to assist the majority of taxpayers with free tax preparation assistance as well as free electronic filing of tax forms.
At the University of Missouri, students in the Personal Financial Planning Department and University of Missouri Extension Faculty have partnered to sponsor several community VITA (Volunteer Income Tax Assistance) sites as well as a campus site (located in the Office for Financial Success; Stanley Hall). These IRS-certified volunteers will prepare tax returns for students and working individuals/ families with incomes under $40,000. The returns are prepared and filed electronically with the opportunity to have refunds directly deposited into checking, savings, IRAs, and other types of accounts (see tip – http://financialsuccess.missouri.edu/tipoftheweek/refundsplitting.pdf). This is a great resource to help consumers avoid preparation fees and costly refund anticipation loans. This filing also includes your state returns and everything is done at no cost! Services will begin on February 4th. Walk-ins only – no appointments needed. [Locations and availability info are provided below] …
– Current tax info (standard deductions, exemptions, tax brackets, etc.)
– Information on deducting student loan interest
– Do I have to file? [typically worthwhile even if you “don’t have to”]
– Information on earned income tax credit
– Information on education tax benefits
– Federal and State tax forms
– Link for free online filing (AGI below $54,000)
– Tax tips, recent law changes, and other tax topics
– “Understanding Taxes” – an interactive, instructional IRS tax program
RECEIVING FREE ASSISTANCE.
Free volunteer tax preparation sites are available across the country. VITA is available in most communities as is AARP for the elderly. VITA sites throughout Missouri can be located at: http://extension.missouri.edu/hes/taxed/vitasites.htm. The VITA link above can help you locate VITA sites for those outside Missouri. Andrew Zumwalt is the MU contact for VITA (ZumwaltA@missouri.edu).
Columbia Locations (2/4/08 – 4/19/08).
OFS – 61 Stanley Hall (basement)
Tuesday, Wednesday, Thursday (4:30 – 8:00), Saturday (10:00 – 1:30)
*Central Missouri Community Action
Monday & Wednesday (10:00 – 1:30)
*Sites will be closed March 22 – March 30 (Spring Break).
The beginning of the year is a great time to reflect on the past and consider ways we can improve our lives moving forward. A year ago I decided to lose weight … five mornings/week at the gym, eliminating sugar, a supportive wife, and a year later I’m considerably lighter [nearly 100 pounds]. This year I’d like you to consider ways to redouble your financial efforts … let me throw out a few potential resolutions:
Review Your Credit.
The beginning of the year is always a good time to review your credit report. Remember that you can do so once per year for free (from each credit reporting agency) at the government’s web site (http://www.annualcreditreport.com). You may want to review a prior tip on specialty reports to see if it is appropriate for you to order those as well …
Getting organized could entail a lot of things: starting a budget, organizing important documents, conducting a home inventory, or starting an emergency fund; all ideas that have been discussed in recent tips.
General Financial Review.
What do you have? What do you need? Do you have what you need? Do you have in place those things that will best meet those needs? Insurance policies, loans, investments and savings vehicles should all be reviewed on a regular basis …
Investing – “Do a little more”.
If you are doing nothing, start now … T. Rowe Price, TIAA-CREF, and Homestead Funds are examples of no-load mutual fund companies that will allow you to open an account with $0 if you set up an automatic investment of $50 per month (less with Homestead). Already doing something, do a little more – increase your 401(k) contribution; Roth IRA contributions are increasing to $5,000/year (more if you’re over 50) in 2008.
Get Rid of Any High-Rate Debt.
If you have high rate debt, now is a great time to work your way out. Several strategies have been discussed in prior tips – calling your card company to request lower rates, and transferring the balance to take advantage of a better rate elsewhere for example.
The potential positive steps you can take in 2008 are endless – my suggestion is to select one area to begin your focus. Perhaps it is something where you can make immediate progress (like reviewing your credit); perhaps you have loftier goals (being debt-free) … regardless of your situation or desired outcome, start today! Reviewing the archive of prior tips may be helpful in getting you started as well (http://financialsuccess.missouri.edu/archive).