Are you losing sleep over the recent slump in the stock market? Concerned that the recent recovery is in for another thumping? In more normal market conditions, investors could move some money out of stocks into bonds and safe investments like money market funds and earn several percentage points on that money. But now skittish investors face a dilemma. Money moved out of stocks and put into low-risk interest-earning securities is likely to earn a rate of interest that doesn’t keep up with inflation, thanks to the Federal Reserve Board’s continued insistence on keeping interest rates low. But if you do feel compelled to do something, don’t make a big change. Instead, if you fear further declines, consider reducing the percentage of money you have in stocks by 5 to 10 percentage points. If you move more than that, you’re likely to miss out on a good portion of the inevitable rebound in stocks. Why? While it’s easy to temporarily reduce your stock holdings, figuring out the best time to get back in is extremely difficult. This reminds me of a chap who got out of the market and stayed out for years. He got back in after stocks had more than doubled in value and, you may guess this, his return to the stock market was just before stocks took another drubbing.
While no stocks are safe, some are likely to hold up better than others, including dividend-paying stocks. If you sense opportunity amidst the recent downturn, go after categories that have not been performing well, like value stocks and value funds. Sure, it takes some guts to do so, but if you’re investing for the long term, lagging categories are most likely to prove the most rewarding.
Smart Money Tips
- Withdrawals from retirement accounts require careful planning. A lot of people are going to be retiring over the next several years, and the decisions they make when they retire can make a big difference in their retirement income. It’s crucial, therefore, for all pre-retirees to plan carefully how you’re going to handle your retirement account withdrawals. A general rule of thumb is that the amount of money you can safely withdraw in your first year of retirement is about 4% of your nest egg, 5% at most.
- Housing market sputters from economic travails. This year’s dramatic and rapid jump in mortgage rates made an already expensive housing market much less affordable. Home prices surged dramatically during the Covid epidemic because demand was extremely high, supply was historically low, and mortgage rates reached new lows. The current housing market remains competitive for homebuyers, but higher mortgage costs and fears of the recession are beginning to cool the market. Weakening demand has been seen in areas that experienced the most dramatic price growth over the past couple of years.
Moody’s recently found that 183 of the nations 413 largest regional housing markets are overvalued by more than 25%. Moody’s predicted that house prices in those 183 regions could plummet by as much as 20% if a recession hits. If there is not a recession, they will still fall 10 to 15%. Moreover, the housing inventory is at its highest level since 2009 as sellers struggle to get rid of their property because mortgages have become considerably more expensive.
So home sellers as well as homebuyers face a bleaker housing market. For sellers, gone are the days when potential buyers lined up to offer more than the asking price. Buyers may have to settle for less house than they had hoped for. In other words, the housing market has returned to normal. Anyone who is in the market as a seller or buyer needs to be patient. Time is a great ally. The flexibility of having sufficient time to craft a transaction to your satisfaction will be an advantage in an otherwise challenging housing market.
Food for Thought
When one door closes, another opens. But we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.
Money Can Be Funny
If all the cars in the United States were placed end to end, it would probably be Labor Day Weekend.
Word of the Week
abecedarian – one who is learning something (as a grammar school scholar learning the alphabet); a beginner.
Origin: Middle English abecedary, from Medieval Latin abecedarium – alphabet, from Late Latin, neuter of abecedarius – of the alphabet, from the letters a + b + c + d. (ABeCeDarian)
“Okay, abecedarians, gather around for another story,” said the teacher, overestimating the linguistic capabilities of his kindergartners.