Tuesday, September 30, 2008

Madd Money: When the Market Swings, Stick to the Plan

Well, yesterday was exciting, wasn't it? A $700,000,000,000 bill was up for a vote... and it was defeated! Wall Street heard the news, and it had a hissy fit to the tune of a 700+ point drop. Congress got the message from the American people, who are slowly, it seems, waking up to the fact that we don't want more debt to come to the aid of institutions and people who made bad choices. To be honest, I'm surprised that the bill went down (most of us thought this was a done deal). What I found interesting was that this was a bi-partisan defeat. It looks like the rather large outpouring of dissent from the people of this country made something very clear. Pass this bill as it has been explained to us, and expect to be thrown out on your butts, regardless of your political party.

Now, of course, comes the big question... what should people do? I can't speak for anyone else, but here's what I plan to do.


Well, OK, nothing isn't really accurate. What I mean to say is, I'm not making any changes to my investment plan. In fact, I'm going to take this opportunity to make a larger contribution than normal into my ROTH IRA. I'm close to maxing it out for the year, so I might as well max it out now. Why am I suggesting putting more money in? Am I not paying attention? THE WORLD IS COMING TO AN END!!!! OK, hyperbole much (LOL!)? But that's what a lot of people in the media are hawking as though it were the gospel truth.

Here's my take on this. After Wall Street finishes with its hissy fit, and the gyrations of this recent spate of news has had a chance to be digested and considered, then things are going to get back to where they should be. Will that be ultimately up or down short term, I have no clue, but I do have faith that history, while it may not repeat, tends to rhyme. Based on that rhyming, most five year periods in the market have made money. To date, all of the ten year periods since the beginning of the 20th century have made money. That includes a lot of pull backs, bear markets, and even the Great Depression. Thus, since my timeline for my money isn't in the days, weeks, months or even years ahead, but is in decades, I'm happy to stick to my original plan and I'm actually enjoying this opportunity to get my preferred investment vehicles on sale.

Some things to consider that are components to my reasoning. I don't invest in individual stocks, I invest in growth oriented mutual funds. I'm also a proponent for index fund investing; most of my IRA holdings are in two index funds:

70% Vanguard Total Stock Market Index Fund
30% Vanguard Total International Stock Index Fund

With this allocation, you really can't get any more diversified across stocks than this. Instead of owning single stocks with a lot of risk, I invest in funds that hold a *lot* of stocks. In many ways, I'm invested in the entire stock market, both nationally and internationally. This means my investments tend to follow the tide; they will be lower when the market is lower, and higher when the market is higher. While it may mean that I may not do as well as some investments when they are making a killing, it also means that I tend to not take as much of a bloodbath when certain stocks get slashed. Thus, regardless of the market gyrations, any money I do not need in the next decade gets invested and I forget about it (well, OK, I don't completely forget about it, but I do not look at my balances any more than once a quarter to get a gauge, and I don't do any playing around until December, and that is only to rebalance my funds to be where I want them to be (meaning I make sure that 70% is in the total market fund and 30% in the international market fund, and in my preferred ratios in my other investments, such as my company's 401K plan).

Thus, in my nothing more than amateur armchair personal finance geek manner, my recommendation to anyone who is nervous about what is happening, I would suggest asking yourself, what is your goal, and what do you intend to do with your money? If you don't need it in the short term, , I'd suggest not worrying about it and using the market gyrations to get your favorite investments while they are on sale. If you have any plans of using your money for a concrete purpose within the next five years, I'd say "get it out of the market and put it into a respectable savings vehicle", such as a high yield savings account through a bank like ING Direct. Do not play in the stock market with money you are depending on in a short period of time, as you have the potential of getting creamed if you do that, and often at the least opportune moments. Whatever you do, don't just run around scared because talking heads on the TV are telling you to be scared. Know your goals, learn about your investments, and most of all, have a game plan and stick to it.

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