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Home > So...How is our economy doing? Part II
 

So...How is our economy doing? Part II

July 14th, 2008 at 09:29 am

After my history lesson from yesterday combined with the numbers of today, I feel reassured that we are just hitting a low, but the ship is not sinking.

I do have some money in the stock market and honestly, I feel that I have no business whatsoever being in the stock market.

The amount of money I had in stocks in 2005 rose gloriously, tumbled a bit, went up a tad, tumbled some more, tumbled some more, and is now sitting in the stock market at the exact same amount I had in 2005.

I am not a financial whiz, but common sense tells me that if the money had been in some type of bond or money market account I would have been better off than I am now.

I invested in those diversification stocks, the kind where it's hundreds of little shares wrapped up in one stock that you buy. And I have not touched it. The money is earmarked for retirement and I have heard the old saying "what the stock market is doing now is not important compared to how its doing 2 or 3 years before you retire." Or some variation of that advice.

So yesterday's question(s) was a bit aimed to try and see if the world was falling and my money would be gone or worthless when I retire. I gather it will be ok. Yesterday I was researching (not just on this blog) just what I should do with my nest egg sitting in the stock market. I feel like I came up against a wall.

~The stock market is expected to continue to go down. But how much down and for how long, no one is sure. I have read somewhere that for this year, the stock market went down almost 20%. And I know from Suze Ormanís little demonstration that when you lose 20% you must earn 40% to get back to where you started.

~Inflation has been going up quickly. Inflation is outpacing interest rates, so investing in treasury bonds or high yielding anything, you will still be behind the inflation curve.

So I am guessing everyone is just losing money right now? And no one is pulling ahead because there is no vehicle in which to invest to make money? I donít know. I just canít help but wonder if there was some point in the last year or two when everyone saw a big flashing warning sign that I missed telling us to pull out of the market. But I missed it. And now Iím not sure if I should stay in because I have 30yrs to let it rebound, or if it goes down another 20% then thatís a lot of percentages I will be ĒhopingĒ to make up.

Because in the stock market I feel clueless. I feel like I am sitting around month after month ďhopingĒ that this months number is higher than last months number. At least with money market accounts, CDís and bonds I understand what I am doing and feel that I have some sort of control over my money.

I have only been trying to learn about stocks for 2 Ĺ years now. From what I have seen, it goes up a tiny bit at a time, but goes down a lot farther than it goes up. But I am assuming over the long run it goes up more than it goes down? Or is it savvy investors that are constantly buying/selling that win in the stocks? And they tempt the little guy (me) to get in the stock market by all their wild tales of making thousands of dollars in a few months. When in reality it is like the housing boom was, prosperous for a few people who knew what they were doing, but bad for everyone else who thought they just had to get a house and watch as their equity rose.

I am pretty uneducated as far as money goes. I am trying to learn as much as I can. But I worry that my lack of understanding will lead to me mismanaging my way to the poor house.

1.So stock market. Best left to experienced financial whizzes or safe for the common gal?

2. Am I on par that my 2005 investment amount is my 2008 amount or is everyone else way ahead of that number and I screwed up somewhere along the way?

3. If diversified and left alone, over the course of 30 years, will the stock market on average go up more than it goes down? Or do I need to be heavily involved to make that happen?

4.Was there a big flashing neon sign telling people to get out of the market? Has that sign flashed lately? Is there a formula to follow, like there is to see if buying a house is a better financial move than renting?

5.Are these questions way to heavy to be asking on a little blog? Once again my age is working against me and I have no idea if the things I see are alarming or just part of a historical trend.

Thanks once again for your input. I appreciate it.

9 Responses to “So...How is our economy doing? Part II”

  1. PauletteGoddard Says:

    1.So stock market. Best left to experienced financial whizzes or safe for the common gal?
    This common gal is up $400 in one investment. Do not buy high. I looked at passionsaving.com for an idea as to where the S&P index should be for me to make anything above 1.5% profit. If I have to put money in now I put it in bear funds, high dividend funds, the RSW and PHO ETFs, and gold. I don't buy common stock except through direct investment plans, and the common stock companies have to be global, dividend-bearing, and very established.

    2. Am I on par that my 2005 investment amount is my 2008 amount or is everyone else way ahead of that number and I screwed up somewhere along the way? I don't know. I'm with you in that I feel I screwed up somewhere.

    3. If diversified and left alone, over the course of 30 years, will the stock market on average go up more than it goes down? Or do I need to be heavily involved to make that happen? The trick to answering this question is to know where the indices are at the beginning and end of the thirty-year period. There is about a 98+% chance the stock market would go up in that period.

    4.Was there a big flashing neon sign telling people to get out of the market? Has that sign flashed lately? Is there a formula to follow, like there is to see if buying a house is a better financial move than renting? Not to me. Maybe to people who can claim the investment credit (spending 2% of their income on daytrading, datafeeds, trading fees) though. My own silly formula is not to be bullish until the NASDAQ level reaches my birth year or lower. Where are the baby boomers going to get the money to fund the retirements they plan to take in five years. 401(k) plans are still contributing to mutual funds and purchases are still being made in the market.

    5.Are these questions way too heavy to be asking on a little blog? Once again my age is working against me and I have no idea if the things I see are alarming or just part of a historical trend. I don't know this either. My in-laws tell me it'll be a rerun of the 1970s, which my husband emerged from okay. My parents were too broke in the 1970s anyway for us to notice any change in living standards.

  2. gamecock43 Says:

    hmmmm...you muddled me there with your talk of RSW, PTO's and whatnot. I wish I could take an investing course. Thats on my list of things to eventuially do. As for the rest of it, I get the idea that I am doing ok, investing in the market was not the WRONG thing to do, and I guess I will learn more as time goes on. I just hope I dont learn through mistakes. Keep the advice flowing guys.

  3. merch Says:

    Again, there is some incorrect information in your blog. Currently, there are many bond extremely safe investments out pacing inflation. Such as 5 year AAA banking bonds, 10 year treasuries, average 10 year muni, etc.

    Source: http://www.bloomberg.com/markets/rates/

    Also, inflation has averaged about 3.85% year since 1947. It is currently at 3.9% year over year.

    Source of a nice little graph: http://bigpicture.typepad.com/comments/2006/06/chart_of_the_we_3.html

    The total average return of a 10 year period for the S&P 500 is 130% (adjusted for inflation. The average 30 year return for the S&P 500 is 405.87% adjusted for inflation. Average 1 year return for S&P is 9.22%


    3) So for your retirement investments, you should have a collection of stock mutual funds allocated across US large, small, and mid cap companies; international; emerging markets; and maybe a high yield bond or other bond fund. You should reallocate at minimum once a year. Like what the portfolio managers call sector rotation, except this is more asset class rotation.

    You canít leave your investments alone because your allocations will change over time. All so, if you donít rebalance your portfolio, you could take on more risk without realizing it.

    4) Yes. There were signs. The biggest being the yield curve inverted. But for you, the answer is to continually dollar cost average and then once a year rebalance. You should not try to time the market. It has been proven that novices who time the market usually lose on about 50% of the gains.

    5) You should educate yourself. Read the intelligent investor by Graham. This who taught Buffet. You should also try to read the WSJ or a financial website. I would recommend you read Bloomberg.com, just to see whatís going on. Did you now that an update came out regarding the FED tightens mortgage rules, Bulgariaís inflation is at 15.3%, or Bill Gross like the dollar more then the Euro (and why should you care).

    I just think that most of your questions and fears are coming from lack of knowledge. So read an investment book and read some of the economic headlines.

  4. merch Says:

    Oh and please read my comments on your last entry for where I think the state of things in the economy are.

  5. gamecock43 Says:

    Yes, I read that merch. Yesterday and today. Thank you, I will look into those websites. I need to learn about this yield curve you mentioned.
    I guess it's hard because numbers and stats can be interpreted in so many different ways, so it's easy to scew numbers to be optimistic or pessimistic.

  6. gamecock43 Says:

    The more I am learning the more questions I have. Do you guys have fun answering my questions or should I go back to lighter topics? I have about a weeks worth of questions built up about now.

  7. sillyoleme Says:

    I'm not a financial expert by any means, but I did have a second major in Finance, and in my classes, this is what I learned (in regards to your questions):

    -Overall, the stock market averages a 12% return over the long-term. Of course, that number will change depending on what time frame you are looking at, but over the course of history, it's just about 12%. That is much better than you will find on a Certificate of Deposit, Savings Bond, Savings Account, etc.

    -It sounds like you have diversified investments, which is good. As long as you are diversified into different types of stocks, you are reducing your risk for loss. If you have one stock, there is a good chance that it will lose value. But if you have three stocks, the chances they are all three going to decrease is less. And if you have 100, even less.

    -The average person is fine investing in the stock market, as long as you are VERY diversified, or use index funds, etc. And as for being "heavily" involved... we were taught that the easiest way to lose money in the stock market is to buy & sell stocks constantly. Make a researched, educated decision on which stocks to buy, and stick with them.

    -The VAST majority of people cannot "beat" the market. People that try to make a living off of playing the stock market have a hard time of it. Even if you have all the economics figured out, there are so many factors that affect the market (emotions, fear, bias, politics), that the "human" factor will get you every time. Markets and economics are heavily involved with numbers, equations, supply/demand, etc... but as long as it is HUMANS trading, it will never be wholly predictable.

    Like I said, I'm not financial expert. Someone will probably be able to give a much more technical and detailed answer. But my opinion is, you will be fine with your investments. Sometimes I get kind of depressed thinking about how "unfair" it seems that BF & I are trying to start our lives in this economy, which rising gas prices that are difficult for us to adjust to and everything else. But then I realize, if we can make it through this, and keep investing, we just might end up with some pretty good returns. What better time to invest than when the stocks are at the bottom?

    Hope you got some useful info out of all that rambling. Smile

  8. gamecock43 Says:

    Yes. you were helpful. The stock market earning 12% return was what I heard to. I was told to count on 11% return "just to be safe". Right now, I am at 0% return. hmmph.

    And I see myself as lucky to be "starting out" in this economy. This means I wont be spoiled and unable to adjust in future markets. And besides, I am a slow learner and would hate for everyone to jump out of their starting gates making crazy money, and just when I feel confident enough to jump in, it all goes away. Right now I have some learning time before it's time to make crazy money.

  9. Broken Arrow Says:

    I'm not an expert either, but I did stay at a Holiday Express Inn once. Big Grin
    1. I recommend index funds or ETFs. I recommend to contribute to it passively and not look at it.

    2. I don't know about others, but I'm suffering about the same "losses" as the overall market. However, I also think it's a bit deceiving to look at your investments in terms of dollar value. That's only important when you're getting ready to sell. Instead, what's more important is to look at how many shares or NAVs you can buy with the same amount of money, and times like these are the best times to buy.

    3. In 30 years, it will most likely go up. The others have already provided a good explanation and numbers for it.

    4. Sort of. I've seen others notice since back in 2006. I don't know if I am capable of that myself, but to me, it's largely irrelevant anyway.

    The market is like your surly boss at work: You really can't do much about him or her. You can only work your way around it and find the best opportunities available given any situation. Fortunately, opportunities exists even now, but one does have to work at it to find them. It would probably be best to just buy index funds and invest passively.

    5. No, I don't think they're that heavy at all! These are the same questions that I ponder during much of my waking moments. I don't pretend to have all the answers, but I believe that the our boss, Mr. Market, is just being in a bad mood right now.

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