BOSTON (MarketWatch) — Virginia S. lives in the Toledo, Ohio area and is nearing retirement as teacher at a religious school.
These days, she is having trouble with her faith.
That’s not a comment about her religion, but rather about maintaining her confidence in the stock market and economy, and hanging on to her belief that years of planning on a modest salary will pay off.
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 ”I keep hearing experts say that consumer confidence is important, but I don’t see anything that could make me confident,” Virginia said via email. “I have time and I wouldn’t mind working longer, but I’m not sure I see it all paying off any more. Why, exactly, would anyone expect someone like me to be confident? What reason do I have to be confident?”
Virginia is far from alone in her flagging sense of trust in the market. On Tuesday, Investor’s Business Daily released its August figures for the IBD/TIPP Economic Optimism Index — an indicator that typically does a good job of foreshadowing what to expect from more renowned consumer confidence benchmarks released later in the month — and it showed a nice pop in good feelings. That said, the 14.4% pick-up in August left the IBD index at 42.8, which is still deep in pessimistic territory.
Looking ahead
Between the housing bubble, credit crisis, inflation worries, concerns over the weak dollar, the potential for the economy to drop into a recession, a stock market that seems more anxious in falling than rebounding, and more, it’s hard to believe an investor could have any faith and confidence left.
Those flames of despair are fanned in chat rooms and message boards by market timers, who suggest that the best way to go is to be out of the market, or following some specialized system, the kind of thing an average investor like Virginia is not likely to do.
In times like these, it might seem as implausible as the existence of Santa Claus, but yes, Virginia, there are reasons to be confident.
Without sounding like a Pollyanna, here are six of them.
1. Market cycles have not been suspended.
While investors have internalized the idea that stocks return 10% annually, that’s an average figure, and no one should believe the stock market is a guaranteed payout machine.
But down cycles have invariably led to up cycles. While many market observers suggest that people should expect the market to deliver an average of 7.5%-8% on average for the next 25 years, it still won’t be a straight-line result.
“If the time you are buying into that average annual return is negative or zero or two, you can expect that somewhere during your investment life there will be a catch-up period,” says Kathy Kristof, author of “Investing 101.”
It would be great if you could avoid the pain and simply invest during the hotter catch-up time, but most people don’t have that kind of vision or timing.
2. The one place your dollar is going further, these days, is the stock market.
Americans are known for being great consumers and lousy savers, but they stink at buying stocks when they go on sale. The same people who would rush out to the mall the next time they hear about a sale on shoes would run away from high-quality companies that are likely to pay for their shoes five or 10 years down the road.
Great companies will survive bad markets; they won’t always be cheap.
3. Numbers don’t lie, but they can confuse the heck out of people.
If you want to view the glass as half-empty, you can produce market statistics that show the decline in 2008, or a time frame which shows a long stretch where the annualized average gain on the market was 0%.
If you want to show the glass half-full, you ignore the current pain in favor of five-year numbers which show gains of nearly 8% annualized over the last five years, despite the recent pain.
Find the numbers that are most important to you, the ones that act as a cornerstone to your philosophy and decisions. There are many ways to read the market, and more than one picture is correct, but what matters most is what you believe in.
Spend less time worrying about whether the glass is half-full or half-empty and more time worrying about what is in the glass. If you like the looks of the market long-term, then it’s like a glass of your favorite cocktail or brew, and it’s easy to see it as half-full; if you’re lacking confidence, it looks like a glass of mud, and you’re hoping it’s half-empty because you don’t want to choke it down.
4. Diversification is better than the alternative, even when it means that parts of your portfolio are hurting.
If you pull all of your money from the market, you avoid principle risk — the chance that you lose money in the market — but embrace purchasing-power risk, the chance that your money won’t keep up with inflation.
Since financial harm happens in many different ways, the best way to keep your cash out of harm’s way is to expose it to many different forms of danger.
5. Working a bit longer — and putting off Social Security — will do things for your retirement nest egg that regular savings didn’t get done.
Research released recently by T. Rowe Price Associates shows that postponing retirement and waiting longer to take Social Security will dramatically increase the staying power of your retirement savings. Christine Fahlund, senior financial planner for the T. Rowe Price Group, says that delaying retirement and Social Security from age 62 to age 70 can double a person’s income in retirement.
Working longer may not be anything to crow about, but it is possible to play catch-up, even in times when the market is not giving you much help.
6. It feels so bad, but it hurts so good.
Typically speaking, the best investment decisions are the ones that feel the worst when you are making them, the ones that try your faith and confidence.
For someone like Virginia, having confidence can be its own reward. In the words of Saint Augustine: “Faith is to believe what you do not see; the reward of this faith is to see what you believe.”
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
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Investors: Stand by your plan
~ By Anne Kates Smith
~ Kiplinger’s Personal Finance
What are we supposed to make of this whiplash market? I’m certain that the only sane way to play the crazy ups and downs is to hold fast to the investing tenets we at Kiplinger have preached for years (that’s why they’re tenets).
Among them:
? Most investors are lousy market-timers. So don’t attempt it, period. Take a look at a couple of the worst months for mutual fund net redemptions on record: In October 1987, investors withdrew 3.6 percent of stock-fund assets, and in July 2002, the net outflow was 2.05 percent, according to the Leuthold Group, a research firm in Minneapolis. A year after investors bailed, the Standard & Poor’s 500-stock index was up 10.8 and 8.6 percent, respectively. The two-year gains were 35 and 21 percent, respectively.
? Calling market bottoms is a futile exercise. The stock market typically bottoms just past the midpoint of an economic downturn. One year past the trough, the average gain — dating back to 1892 — is nearly 44 percent, says Leuthold.
? It’s all about buying low and selling high. No need to fixate on market legends such as Joe Kennedy or Warren E. Buffett. Regular folk can ensure they are buying low and selling high by dollar-cost averaging and rebalancing their portfolios.
By Definition, dollar-cost averaging (investing the same dollar amount in the market at regular intervals) gets you more shares when prices are low and fewer when prices are high. Just as important, and maybe more so, averaging forces you to keep putting money into stocks (or stock funds) when you might otherwise not do so — that is, when share prices are falling. If you are contributing to a 401(k) or other similar plan, you are dollar-cost averaging.
? No market is a monolith, so you have to diversify. The stock market’s dismal performance this year has challenged the conventional wisdom about the desirability of diversification. Just about every sector and every foreign stock market has sunk. Most segments of the bond market have lost money, too, although it has been possible to eke out a positive return by investing in Treasury bonds.
My guess is that this year will turn out to be an anomaly. So I stand by the tried-and-true formula of maintaining a diverse portfolio, which you can achieve by investing in a mutual fund that is pegged to a broad index, or by holding a mix of funds, including those that focus on small-company stocks, large-company stocks, stocks of fast-growing companies, bargain-priced shares, international stocks and so on.
For a graphic illustration of how important diversification is, visit http://www.callan.com/research/institute/periodic, which has a color-coded periodic table of investments. You’ll see, for instance, how dangerous it would have been to load up on small-cap stocks in 2007, even though they beat blue chips in seven of the previous eight years.
It’s probably not — I repeat, not — different this time. Just as I question the way people rationalize prices that reflect a bubble at the top of a market, I’m suspicious of claims that this bear market is “different.” It might be worse, but it’s not the first deflated bubble, or the first downturn exacerbated by leverage and derivative securities, or the first time the government has come to the rescue.
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In This Chaotic Market, Stay Steady With These Solid Investing Tenets
South Asian Journalists Association (SAJA) presents a talk radio show on 24 Sep, discussing the various aspects of the turmoil in the current U.S. economy.
Speakers includes:
- Vikas Bajaj, business reporter, The New York Times;
- Anirvan Banerji, co-director of research at the Economic Cycle Research Institute;
- John Laxmi, co-founder of a New York-based private equity firm with $4 billion under management (and SAJA treasurer);
- Sudeep Reddy, economics reporter and “Real Time Economics” blogger, The Wall Street Journal.
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BlogTalkRadio: US Economy Turmoil
- Wall Street Journal | Oct 6, 2008 -
- Posted by Heidi N. Moore -
A Goldman Sachs Group alumnus in charge of the nation’s economic rescue? How unusual.
Except, of course, it isn’t. As The Wall Street Journal’s Deborah Solomon reported today, Treasury Secretary Hank Paulson is promoting Neel Kashkari, the Treasury’s assistant secretary for international affairs, to be the point man overseeing the $700 billion financial bailout as the interim head of Paulson’s Office of Financial Stability. The full appointment would need Senate confirmation, which is unlikely to come given the short remaining tenure in this Administration.
The move essentially puts a new title on what Kashkari he has been doing since he joined Treasury in 2006–examining the consequences of an economic housing fallout. Kashkari was one of three Treasury staffers–including general counsel Robert Hoyt and head of legislative affairs Kevin Fromer–who stayed up until 4 a.m. last Sunday putting together the $700 billion bailout bill that was shot down by House Republicans the next day.
Kashkari is an Indian-American who has a few things in common with Paulson . Both are former Goldman Sachs bankers, though Kashkari, at 35 years old, is much younger and was just a vice president-level banker in Goldman’s San Francisco technology banking effort when Paulson tapped him to join Treasury. Both also are Midwesterners. Kashkari grew up in Stow, Ohio, and earned a bachelor’s and master’s degree in engineering from the University of Illinois at Urbana-Champaign. Paulson was raised in Barrington Hills, Ill. And both sport similar hairstyles– or lack thereof.
Kashkari didn’t take a conventional route into banking. He started out as an aerospace engineer at TRW, developing technology for NASA projects like the James Webb Space Telescope, the replacement to Hubble, which is scheduled to launch in 2013.
He earned an M.B.A. at the University of Pennsylvania’s Wharton School of Business. While there, one of his professors was Michael Useem, who liked to put students through grueling, Outward Bound-type strengths of endurance and strategy. Kashkari participated in one Army simulation in 2002 at Fort Dix, where he was quoted in this 2002 Philadelphia Inquirer article in a comment just as applicable to today’s financial crisis as the project he was working on: “We were all taught to play nice,†Kashkari said. “So who’s going to fight in the sandbox?â€
After Wharton, Kashkari joined Goldman and worked in San Francisco, where he advised companies that create computer security programs like antivirus software. He and his wife, Minal, still keep a house in California.
Paulson likes to surround himself with people he’s comfortable with: people, mostly, from Goldman Sachs. Paulson’s inner circle already includes former Goldmanites Dan Jester, a financial institutions banker, and retired banker Steve Shafran, who focused on corporate restructuring at Goldman. It also included Robert Steel, who has since left Treasury to become CEO of Wachovia.
Kashkari’s appointment is another example of how deep those Goldman Sachs ties go. In fact, Paulson himself was recruited by a former Goldman Sachs banker: former White House Chief of Staff Josh Bolten. Bolten overcame Paulson’s reluctance to persuade him to take the job as Treasury Secretary at a time when Paulson was so wary of the job that he declined to meet with President Bush because he knew he couldn’t say no to the President himself. According to an article in The International Economy by Fred Barnes in 2006, Paulson also believed that the Bush administration would not be able to accomplish many financial changes in 2007 and 2008. Kashkari’s new job show just how wrong Paulson was back then.
More:
Meet Neel Kashkari: The Man With the $700 Billion Wallet
