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Stock Market: Are You Afraid of the Dark? March 10, 2008

Posted by pf in Uncategorized.
Tags: , , , , , , ,

The last couple of week have been grim…and the outlook seems to be getting darker all the time. You may recall over the last couple of months I have made contributions above and beyond my normal rate in an attempt to buy on the way down.

Of course, not surprisingly, I had no idea how far it might really go. Nonetheless, I’m staying the course and will shortly invest another chunk to complete my Roth IRA contributions for 2007. Meanwhile, I’ll remind myself that there are no monsters under the bed and I shouldn’t be afraid of the dark.

On the lighter side…

Recently, I read one of the “Millionaires in the Making” articles on CNNMoney. Sometimes they have something of use, and often they are moderately entertaining. In the most recent article about Ryan and Hope Wells, there was a particular item in the section entitled “Our Expert’s Take” that I found interesting:

“DeCharles believes that the Wellses are smart to prioritize their emergency savings, which she recommends they keep in a money market fund with no stock exposure.”

“Forget the funds for now,” DeCharles said. “Especially with the market heading down, they have to build up their cash reserves first.”

Now, I have written before about what I think about this topic (Do I Need An Emergency Fund?). However, that’s not what struck me. What caught my eye was the remark about staying away from equities…”especially with the market heading down”.

Ack! Now, not everyone may feel the same way, but in my view, a couple in their twenties should not be shying away from equities…particularly when the market is headed down. Don’t get me wrong, I understand the person wanted to make them feel good about their choice to focus on building up an emergency fund and rationalized it with the whole market going down comment. I just think it’s a bit short-sighted is all.

I think the take-away is that financial advice is just one more data point amongst many (hopefully), that you use to make your financial decisions.  No one knows “the answer” and if they did with any certainty…they likely wouldn’t share it with us!



1. Paul Petillo - March 12, 2008

I have been chided by some of the riskiest investors for employing a dollar cost averaging approach to investing no matter what the markets are doing. When they are headed down, you will be buying additional shares of your favorite mutual funds for less than when you would when the markets are soaring. This same principle is used in your 401(k) plan.

You should be exposed to equities at every age. With retirement ages moving farther away, even a fifty to sixty year old should have sizable exposure to stocks, albeit in more staid funds designed to protect capital rather than pursue growth. But by that time, you should have been able to put together a relatively diverse portfolio that includes real estate and insurance as well.

The real key is which funds. Keep tax efficient funds like indexes outside of retirement accounts. And inside those accounts, keep funds that have lower than sector average expenses – preferably below 1.25% and look for funds that keep their turnover lower than their peers.

As to the emergency account – keep one but build it over time if you are young. Many online banks are posting decent interest rates, even as the economy slows.

Best of luck!

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