The Balanced Spreadsheet-Financial News, Budget Advice, Debt help, Financial Tips, and other advice

April 20, 2010

Stock Market Recovery

Filed under: News Review, Real Example, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 7:30 am

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Have you checked the US stock market lately?  Most of us stopped looking when the financial crisis hit in late 2008 and early 2009, but if you have not done so already take a peak and you will notice that it has quietly risen in the past year or so Goldman Sachs withstanding.  I wrote back in November how the stock market had gone up over 50% since its low point on March 9, 2009 and these gains have now carried on into the 1st quarter of 2010.  Tom Petruno from the Los Angeles Times wrote an article on the stock market’s 1st quarter performance in an article titled “Tenacity of stock investors pays off”.  Some of the interesting tidbits:

 Most stock mutual-fund categories scored gains in the first three months of the year; it was the fourth straight quarterly advance since the meltdown of 2008 and early 2009.

The average U.S. equity fund posted a total return of 5.1 percent in the quarter, lifting the 12-month return to 49.4 percent, said the data firm Morningstar Inc.

 “[Stock Market] beat the 2 percent average return of bond mutual funds and the near-zero average yield on money-market funds.”

“U.S. stock funds overall still are experiencing net redemptions, meaning more cash is going out as investors sell than is coming in via purchases. Instead, Americans continue to pump record sums into bond mutual funds.”

 

I went ahead and compiled a chart of how well the three major US Markets (Dow Jones, NASDAQ, S&P 500 have done in the 1st quarter of 2010.

For those of us who have continued to stay in the stock market it is nice to see a good return especially on the stocks that we bought low back last winter and spring.  Still, how is the stock market today compared to when the economic crisis really hit back in the fall of 2008?  I went ahead and pulled up some 2 year graphs showing the change from April ’08 to April ’10 for all three major indices:

Dow Jones

Chart forDow Jones Industrial Average (^DJI)

S&P 500

Chart forS&P 500 INDEX,RTH (^GSPC)

NASDAQ

Chart forNASDAQ Composite (^IXIC)

As you can see all three have rebounded nicely since the fall of 2008, while the Dow and S&P are down 15% from April 2008 and about 25% off their high in October 2007. Meanwhile the NASDAQ is about even over the last two years.  While the 15% decrease is nothing to sneeze about it pales in comparison to the 70% drop during the Great Depression.

As mentioned before it is encouraging to see stock increase in the beginning of 2010.  However, one needs to look at the big picture when investing in stocks and not just a three-month time horizon.  According to Petruno’s article many people are still weary of the stock market.

 “U.S. stock funds overall still are experiencing net redemptions, meaning more cash is going out as investors sell than is coming in via purchases. Instead, Americans continue to pump record sums into bond mutual funds.

David Kelly, strategist at JPMorgan Funds in New York, believes that investors will come to regret their caution. Given that bond yields are low while corporate earnings are rising, “The bond market still looks too expensive and the stock market still looks cheap,” he said.”

I have to agree with the bond market.  Bonds typically do well with low-interest rates and currently we are in one of the lowest interest rate environments ever.  So interest rates have only one place to go and that is up so therefore bonds will become less valuable.  Overall though it is nice to see most of our retirement accounts in 401(K) and IRA’s recover since the economic downfall.

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January 28, 2010

The Financial How to series Part IV. How to start investing for retirement

Part I-How to start a budget

Part II-How to get out of debt

Part III-How to start and maintain an emergency fund

Today we are going to wrap up our “Financial how to . . . . .” series on the topic of how to start investing for retirement.  For some this can be a scary topic as it brings up many questions such as “How much do I need to save now for retirement”, “How much will I need to retire”, and “What types of investments do I put my money into.”  These are all good questions that need to be answered before you start to invest.  With that being said I am going to focus on how to get started and not give any advice on certain funds or stocks as I am far from an expert. 

What is investing?

There are three kinds of investment lengths, although as I will discuss later I think only one is truly investing.  There is short-term investing which is less than one year, intermediate investing which is between 1-5 years, while long-term investing is greater than 5 years.  I consider long-term investing the only true investing as the stock market has usually made money over any 5 year period compared to only about 60% of the time over a 3 year period which is more like speculating and as we saw as recently as 2008, investing for only 12 months is essentially gambling. 

Types of Investing

For me there are two kinds of investing, retirement and non-retirement.  Non-retirement includes investments such as a child’s college fund, saving for a down payment on a house, or investing in real estate.  Retirement investing includes vehicles such as 401(K) and IRA’s.  They have special tax advantages to them, but there is a catch as they have penalties for early withdraws, therefore the decision needs to be made ahead of time that any retirement investing is truly for retirement only.  Most of the time when people talk about investing, they are referring to retirement investing which is the main focus of this post.

Common investments

When investing in retirement accounts, there are three common investments: stocks, bonds, and cash.

Stocks are the most common investment as well as the most discussed.  That is because they have the most day-to-day volatility.  Stocks have traditionally offered the greatest reward but also the most risk.  Stocks have been way down after their highs in late 2007.  But in 2009 they have started to make a recovery.  The key to stocks is to diversify by selecting mutual funds that contain many stocks in one fund. 

Bonds have done well recently with the drop in interest rates.  They have less day-to-day change in price than stocks; however they have historically underperformed the return of stocks.

Cash is invested in things such as savings, money market, and certificates of deposit (CD).  They are “safe” investments, as you do not risk losing any principle with the return being a fixed rate.  Investing in cash to me though is an oxymoron because you are parking your money as you might be gaining 4-5% every year but you will lose most of your gain due to 4% inflation so you gain nothing. 

Commodities include things like oil, natural gas, corn, wheat, and precious metals. Commodities are historically very volatile with huge upswings and downswings. 

Things to look for when investing

Whatever you decide to invest in I would recommend you look into the following three things before investing

Diversification You need a balance portfolio and not have all your eggs in one basket no matter how great of a return you are getting.  Diversification protects against losing all of your savings on just one bad investment.  For that reason when I invest in stocks I do not investing in single stocks but rather mutual funds which are made up of various stocks.

Invest in things with long track records You do not want to start investing in something that has only been around for years.  By seeking out funds with at least a 10-15 year track record you can see how returns have been over both good and bad periods and see if they have been able to weather the storm.

Know where you money is going! Invest in things you are comfortable with.  Never put money into something you do not understand as you do not want to be pressured into something that you do not agree with.  Investing in X because “my co-worker said it was a good idea” or because “My brother-in law invests in it” does not mean it is a good idea.

As mentioned in the opening, investing can be trick and overwhelming for a lot of us.  What you need to do though is to take some time and learn about investing.  Finally, building wealth takes time; it is not an overnight process.  But you need to start soon and invest in good solid investments and not some get rich quick scheme.  The key to building a big nest egg is investing now instead of later.  You might be in your 20’s or 30’s and think you have plenty of time which you do, so use your time as an asset and not a liability.  Also if you are in the later years of your life, do not worry, you can still start today.  It is never too late.

That is the conclusion to The Balanced Spreadsheet’s January 2010 “Financial how to . . . . . .” series.  I hope you enjoyed it and we will be back soon with another series in February.

November 17, 2009

The Stock Market Rebound of 2009

Filed under: Excel fun, Personal Finance, Real Example, Uncategorized — Tags: , , , , — thebalancedspreadsheet @ 8:16 pm

Have any of you been keeping your eye on the stock market recently?  If you are like most people, you stopped keeping track during the last half of 2008 and the first few months of 2009 when everyday on the news they talked on and on about dwindling retirement accounts and how people were withdrawing their money in droves.  Or maybe you stopped looking when you opened up your year end 2008 statement and noticed your 401(K) looked more like a 201(K).  But in case you have not noticed the markets have rebounded some, but the question is how much?  After doing a little research I found out the bottom of the market “appears” to have occurred on March 9th of this year.  I put together a table showing how much the market has recovered since then:

How come the news has not had a lead story covering the over 50% increase in the markets since March 9th?  Granted these gains are after hitting rock bottom lows not seen for over seven years, but what if you had panicked on March 9th and sold all of your stocks and mutual funds?  You would have missed out an over 60% return in your 401(K) and IRAs, while your safe money market account would have gotten < 1%.  In fact I was quite surprised to find that my two 401(K)’s have gotten a 79.5% and 65.3% return since March 9th!

Now I do realize that overall the market is still down about 25% since its peak on Oct 9th, 2007 and that your equities are still down around 20-30% since the start of the recession.  With that being said you sometimes just need to ignore the drama that comes from the news or from Washington and realize that it is not all bad and the recovery is starting.  Just remember that you do not get hurt on a roller coaster if you do not jump off when it is crashing, or when it is rising.  You just have to enjoy the entire ride and know that you will ok in the end.  🙂

August 19, 2009

401(K) Contribution Increases

Filed under: News Review, Personal Finance — Tags: , , , — thebalancedspreadsheet @ 1:26 pm

I found a refreshing article on CNNmoney about the increase in 401(K) Contributions in the 2nd Quarter of 2009.  The article is a week old which I know makes it ancient history, but I want to highlight a few points.

“For the first time in a year, more workers increased the amount of money they put into their 401(K) accounts during the second quarter than decreased their contributions, according to a report issued Wednesday by a retirement fund manager.”

There can be many reasons for the decreased contributions during the past year, mostly fear by investors of putting their money into the market when it is nose-diving, paying down debt, or fear of job loss.  However, I think this is a great time to be putting more money into a 401(K) right now.  The markets are trading around 6 year lows, meaning that you might never be able to buy funds at these lows prices again.  You can kind of say the market is on sale right now so buying low means buying more shares.  Also in the short term, the markets have increased sharply.  Since March 9th the Dow Jones, Nasdaq, and S&P 500 are up 40.8%, 54.1%, and 46.3% respectively!

“Fidelity said the average 401(k) account balance rose 13.5% in the second quarter to $53,900. The increase was primarily driven by the rally on Wall Street, but higher worker and employer contributions also contributed to the rise, the company said.”

After about a year of double digit losses this was refreshing to see.  It was great each month when I was doing our net worth to actually see our 401(K) in the black for the month!  Personally, when you combine the increase in Wall Street and the contributions to my account, my 401(K) experienced about a 33% increase in the second quarter.

“Workers who maintained a long-term point of view are being rewarded with a nice recovery in their account balances,” said Scott David, president Fidelity Investments workplace investing division.”

I think this is a great quote.   By definition investing is having a long-term point of view.  Although my returns made my 401(K) look like a 201(K) the past year and a half, I know I have at least 30 years until I will need to use my money.  This perspective allows one to be able to be calm through this economic turmoil.

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