By JULIA ANDERSON
U.S. stock markets are taking a beating with the Nasdaq now into bear market territory, down 20 percent from its August 2018 high. Apple forecasting lower earnings. The Dow Jones and S&P 500 are off 16 percent and 18 percent respectively from their highs. This week, we saw the biggest stock market sell-off since 2008.
This, my friends, is good news!!! Stocks are going on sale. As Warren Buffett says, "Be fearful when others are greedy. Be greedy when others are fearful."
With share prices down, investors have a buying opportunity not available during most of the past 10 years. That’s because since the Great Recession, markets have been steadily marching higher…the longest bull market in history.
Trillions of dollars floated around the world in the past decade, thanks to easy money from central banks. It makes sense that a great place to park money has been in the U.S. stock market. The money has flowed in, pumping up share prices. Over the past 10 years, the value of many individual shares more than doubled. The S&P 500 (the 500 biggest U.S.-based publicly traded companies) has increased by about 300 percent. That’s even with two corrections, the first in 2011, the second in 2016 when the S&P declined 14 percent.
Now, those who study the big picture, say we are over-due for a pull-back. Bull markets do not go on forever, even this one. They take a breather. They sell off when company shares are over-bought and over-priced. In other words, buyer enthusiasm out-strips performance. Reality must eventually set in as it is right now.
Share prices will more accurately reflect true value as they relate to earnings and profitability. It’s called a free market tied to honest (rule-by-law) quarterly reporting.
This year, volatility returned to markets. Up 500 points one day, down 600 points, the next. Graphically, this looks like the edge of a saw with jagged, sharp pointy ups and downs. News flash: This is typically how bull markets end.
Investors in their 20s, 30s, 40s and 50s should be celebrating the pull-back because this means quarterly dividend money reinvested inside their 401(k) and IRA tax-deferred funds will be buying more shares at cheaper prices. More shares mean more returns going forward as U.S. publicly traded companies continue to pump out earnings. The miracle of compound interest (dividend reinvesting) LIVES!!!
Those nearing retirement or who are in retirement must embrace a more complicated strategy:
Rule No. 1: Don’t try to “time” the market by pulling all your money out. It’s too late and besides you will miss the rebound.
Rule No. 2: Keep most of your nest egg in stocks or stock funds. Don’t touch them. Let the dividend returns reinvest. Hopefully, you have enough cash and/or income to live on while you ride out the downturn.
On NPR this morning, a young economic analyst gave me the impression that people who are nearing retirement should move their money into more secure savings such as CDs or money-market funds. Hogwash! If you do that you will run out of money before you die.
There’s nothing wrong with the American economy or its stock markets. We are just adjusting to higher interest rates (a good thing), a cooling housing market (another good thing) and more reasonable returns from corporations.
We are coming off the biggest bull market in history. It makes sense that volatility will return to markets, that we will see a sell-off in over-bought shares such as Facebook, Amazon and Google. Let’s see earnings in line with operating costs, let’s see Price-to-Earnings ratios at 20 to 30 points rather than 70.
By the way, ignore what’s going on in Washington, D.C. Warren Buffett said he never made an investment decision based on what happens in Washington.
Question: Where am I putting my money in 2019?
Answer: Individual corporate stocks such as Idaho Power, Duke Energy, MMM and McDonalds. Along with substantial amounts in S&P 500 index funds, a telecom index fund and a contrarian stock fund, all inside my tax-deferred 401(k).
I am NOT selling or trading any of these holdings. Even though I am required to withdraw cash from my 401(k), I am doing it out of a small cash fund. I have the rest reinvesting for the long-term.
The outlook for the U.S. economy remains positive, if not more normal. A 3 percent GDP growth rate is good. Job growth is good, consumer spending is positive. Inflation remains tame thanks to cheaper energy…. gasoline, oil. The Fed’s ability to raise interest rates is a good thing.
Don’t panic over the market down turn. Stay the course. Reinvest the dividend money.
Stocks are on sale!!! Buy low and hold on.
"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." - Warren Buffett, business magnate (1930 - )
By JULIA ANDERSON
A woman I met while traveling this fall gave me living proof that you still can retire early.
In her mid-50s, she had left behind a successful career in marketing a year earlier and said she was enjoying every minute of her freedom or as she called it, her “financial independence.”
How did she do it, I asked, as we strolled along Camino de Santiago with our tour group in Spain.
“I realized at an early age that I didn’t want to end up like a lot of girls I knew… out of high school with a baby, in debt with no future,” she said.
At age 13, she began asking her parents about saving money, going to college and getting ahead.
“It really wasn’t that hard…I just stayed focused, saved and invested. I wanted to retire early. Over 25 years of working, I made it happen.”
Listening to her, I heard three key points:
She started early.
She saved, and more importantly invested her savings in stocks and stock funds.
And she was careful about her spending and taking on debt.
She likely has a portfolio worth several million dollars. (I didn't ask). Her investment returns are spinning off enough income that she can afford to travel, manage her money, pay taxes and not worry about running short of cash. She’s starting to investigate nonprofit work as a way to diversify her life.
You might say that this woman is exceptional. How many 13-year-olds do you know who are thinking about their long-term financial futures? Instead of being a victim of circumstance, she set out early to take charge of her life. At 55, she has choices for what comes next.
Let’s start with her focus.
Starting early with saving and investing goals is key. The more time you have to reinvest earnings the more you benefit from the miracle of compound interest in the form of dividend-paying stocks and mutual funds.
For instance, if you invest $600 a month starting at age 25 with an 8 percent annual return, at 65 you will have a nest egg of $1.24 million. That’s inside a tax-deferred investment account. If you invest at a higher rate and start earlier, the outcome will be even more rewarding and you may be able to leave a job sooner.
Investing aggressively also is key. Your money must go into an aggressive stock growth fund, preferably an index fund with low or non-existent fund management fees. On average the American stock market has increased in value 8 to 12 percent a year for 50 years. It doesn’t matter which political party is in charge. You just must believe in the American economy and American ingenuity and the rule of law regarding market transparency and management. The federal Security & Exchange Commission is there for a reason…to keep people honest.Coincidentally, one of my favorite financial columnists, Michelle Singletary, wrote on this topic for the Washington Post recently. She talks about the FIRE movement (Financial Independence, Retire Early). These people hope to achieve their goal of leaving the regular workforce in their 30s by "living on far less than you are earning, then investing what you don't spend."
Singletary sees that as doable by living on less and controlling expenses. "They cut their expenses to the bare bones, saved and invested well enough that they could tell their employers, "Peace out. I'm done."
Women friends of mine tell me that they are afraid of stocks, afraid of losing money and have stayed on the sidelines when it comes to stock market investing. You will never retire early with that risk-adverse thinking. In fact, you might not be able to retire at all.
The other factor for my traveling friend was smart spending. She lived conservatively. Don’t let your debt get out of control. Don’t buy more house or car than you can afford. Pay off credit card debt every month. Don’t live it up now but pay for it later. Saving and aggressively investing for the long-term will get you where you want to go.
Marketwatch.com writer Andrea Coombes offers a five-step plan for finding “financial independence,” early: Reduce spending and put more aside from the start. Do that by figuring out where your money is going. Invest your savings in low-cost index mutual funds along with a few blue-chip dividend-paying stocks. Keep your housing costs down now, and in retirement.
Make sure your health care costs are manageable by using a high deductible health plan. Factor in taxes…federal, state and local. If you are younger than 59 ½, you will pay a 10 percent penalty on withdrawals from a 401(k). Talk to a CPA tax expert about ways to avoid penalties and keep taxes low.
My view: Stay the course. Don’t let month-to-month or even year-to-year markets swings rattle your resolve. Save and invest for the long-term. Remember Warren Buffet’s rule to “Never invest in a business you cannot understand” or his other rule, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
How about investment guru Peter Lynch’s rule: “Time is on your side when you own shares in superior companies” or “Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.”
As for my woman friend --- She started early, got an education, made some money, saved and invested it and retired early. It CAN be done.
I meet women all the time who face job and money transitions and who want to do them right. It’s about building confidence and taking charge of the future. This is your money. No one cares more than you do!
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