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How does the market nosedive affect your wallet?
An Indian money changer counts U.S. dollars at a foreign exchange counter in Bangalore on August 8, 2011.
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Kai Ryssdal: There's a certain numbness that creeps along when you start seeing downturns on the Dow like we've seen the past couple of sessions. Like it can't possibly be real 'cause it's just so crazy.
Except if the past three years have taught us anything, it's that market slides like these can be all too real. And all too damaging. So do you sell, or buy? Or do nothing?
We turn now to Marketplace Money host Tess Vigeland. Hey Tess.
Tess Vigeland: Hello, Kai.
Ryssdal: So let's start, I suppose, with interest rates, theory being, the downgrade interest rates are going to go up because the government's going to have to pay more to service its debts. What about our debts? Is there a trickle-down here?
Vigeland: There is, but it's not likely to be something you notice in a big way unless you have an adjustable rate mortgage. Your credit card rate may go up ever so slightly because of the downgrade, but it's going to go up a heck of a lot more if you miss a payment.
Most auto loans are fixed-rate. A lot of folks have 30-year fixed mortgages, so absolutely nothing is going to happen there. But again, if you have an adjustable mortgage, you may see a difference, only because we're talking about such a big chunk of money. But it's not going to be a huge jump.
Ryssdal: Over time, right? Not, like, tomorrow.
Vigeland: Exactly.
Ryssdal: Talk me down off the stock market ledge. My mind is back in, like, 2008 and 2009.
Vigeland: You don't want it to be there, Kai. Not a good place to be. How about we all take a deep breath? If you are looking at your portfolio today, it's not going to be pretty. If you're looking at it in a month, it's probably not going to be pretty. But here's your other option, Kai: Don't look!
Most of what we call average investors, they're in the market through retirement plans, college savings plans. If you're younger, you're probably more in stocks. You don't need that money. And what you're doing is dollar-cost averaging...
Ryssdal: ...Same amount invested over time gets you in a better place.
Vigeland: Exactly. And if you're older, or maybe your kid is heading off to college, you probably shouldn't have a lot of exposure to stocks anyway. But if you're feeling crunched, Reuters' personal finance editor Lauren Young says it might be time to hire a professional.
Lauren Young: There are defensive, conservative-type things you can look at and what you need might be income just so you don't have to touch your nest egg. There are all sorts of ways of looking at taking social security. And I wish there were a blanket thing that everyone could do one thing and it would all be okay, but that's not the case.
Vigeland: And Lauren also pointed out, if you move all your money to cash, you're not getting anything for it right now. You will, however, also miss out on any recovery that happens down the line. And you know, Kai, that's exactly what happened back in March of '09.
Ryssdal: Yeah, it is. But here's the thing. People are looking at today and they're thinking, Oh my goodness, we're in 2008. And it was a long way down to the bottom in March 2009. What are we supposed to do, just sit and watch?
Vigeland: That's exactly what you're supposed to do, if you are a long term investor. We are not about what happens every day, every week, every month, even every year. Put that statement away. Don't look at it. If you really feel like you've got to do something, review your asset allocation. You want a little more gold? Get some. you want a little more emerging markets? Get some. Just don't do it now all at once, because you are acting on fear and on irrationality. You're not a professional investor. Frankly, a lot of them are not acting rationally either.
But here's something else you can do: you can educate yourself. I talked to Richard Peterson, who's a psychiatrist and investment adviser with a firm called MarketPsy, and here's what he told me earlier to day.
Richard Peterson: I think that this is a wake-up call. This is time to pay attention to, what is finance? How do companies earn money? All of these things that maybe we didn't really want to pay attention to, it's important for all of us to take some responsibility and be thoughtful about it.
Vigeland: And maybe think about what you can do to protect yourself against some of the broader economic concerns out there. Get rid of debt. Take action on things you can control.
Ryssdal: And also, don't open those statement envelopes when they come, 'cause that's just scary. Tess Vigeland hosts our personal finance show, Marketplace Money. Thanks, Tess.
Vigeland: Thanks, Kai.
Ryssdal: If you've got more questions about how all this affects you, your student loans, perhaps, or your mortgage? Is another recession nigh? Tess and a panel of experts are going to be taking questions on Wednesday. The answers on Marketplace Money this weekend.
The Dow first hit the high ten-thousands in April 1999. Those of us who started long-term investments for retirement and college before April 1999 find ourselves back in 1999, *not* 2008. Three years is *not* long-term. Twelve years (1999-2011) is not long-term for retirement, but for college it's two-thirds of the 18 years between birth and high-school graduation.
The Dow has been above 10,800 more often than not since April 1999, so we long-term dollar-cost averaging types have now, on balance, lost money for twelve years. Of course, we made money back in the Clinton administration, but twelve years is a long time to lose money on one's investments.
Meanwhile, inflation has turned $10,000 in 1999 dollars into the purchasing power today of about $6,500 in 1999 dollars. So even though the market is where it was, we long-term investors are significantly poorer than we were in 1999.
If you're going to try to talk in terms of long-term investment, as you did in this story, please realize that "long-term" for most of us is much longer than three years. And please realize that for college savings, 12 years (except for 15 months from October 2008) of negative returns would require the other six years to be impossibly good to have "dollar-cost averaging" result in a sufficient balance to pay for college.
Financial engineering has succeeded in transferring the wealth generated by enterprises away from ordinary stockholders, toward financial professionals. As a strategy to build wealth, long-term investment no longer works for those of us who don't work on Wall Street. When you encourage focusing on the long-term, the words just ring hollow. Kids born in the late 1990s will understand vividly what "long-term investment" means when they realize it's the reason there isn't enough money to send them to college.
