Your investments are the key to your financial security, and there are a few maxims about the investment markets that you should keep in mind.
First, all types of investments can and will lose money from time to time. As we learned in past bear markets, you can lose a lot of money awfully fast in the stock market. You can also lose money on bonds if interest rates rise or if bond issuers get into financial trouble. While you may think you can’t lose money with safe investments like money market funds and Treasury bills, the interest they pay is usually so low that your money is losing ground to inflation, which can be detrimental as well.
The next truism is what I like to call “the golden rule of investing,” which says that no one can consistently predict the near-term future performance of the investment markets. (See below.) If you start relying on someone’s prediction, you’re headed for trouble.
Finally, the stock market does not move in lockstep with the economy. For example, the economy could stink and the stock market could rise handsomely. (This was acutely apparent as the pandemic unfolded in 2020.) Or the economy could be ebullient while the stock market is a mess. The reason for this is that the collective stock market is always looking to the future – six months or more hence – and reacting in the present to what it foresees.
Now you might think that based on these maxims, you can’t win. This is certainly not the case, particularly if you will need your money to last at least a decade which is sufficient time to smooth out the vicissitudes in the ever changing but upwardly moving level stock of stock prices.
Smart Money Tips
- 401(k) plans are too good to pass up, even if there’s no match. Less than half of the employees who are eligible for a 401(k) plan choose to participate. Some workers think that if their employer doesn’t offer a match, it’s not worth participating. Or they eschew contributing additional money beyond the low percentage that is required for the match. While an employer match is nice, it is simply icing on the cake. An unmatched 401(k) or other workplace retirement savings plan still offers two tremendous advantages – immediate tax savings and the opportunity to enjoy tax-free buildup of your plan investments until you begin making withdrawals after you retire. Here’s an example of the immediate tax savings. Say you can contribute $10,000 annually to your plan and you’re in the 22 percent federal income tax bracket. That contribution will reduce your tax bill by $2,200 ($10,000 multiplied by 22 percent taxes). Put another way, if you forego making the $10,000 contribution to your 401(k) or other pretax plan, your tax bill will increase by $2,200. I haven’t met anyone who would choose to pay more taxes if they have the choice to pay less. Anyone who does when they can afford the outlay is, as the saying goes, one sandwich short of a picnic.
- Shun those who think they can predict the future of the investment markets. There will always be people who think they can predict the future of the investment markets, and they’re often the most vociferous whenever stocks have moved substantially in one direction or the other. Those who do either have an agenda – they want to sell you something or promote their firm or, more likely, they are delusional and should therefore be encouraged to seek mental health counseling. It’s impossible to predict with complete accuracy how the investment markets will fare, particularly over the near future.
Food for Thought
One ought never to turn one’s back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger by half. Never run away from anything. Never!
–Winston Churchill
Money Can Be Funny
Don’t gamble! Take all your savings and buy some good stock and hold it ‘til it goes up, then sell it. If it don’t go up, don’t buy it.
-Will Rogers
Word of the Week
oniomania (oh-nee-uh-MEY-nee-uh) noun – an uncontrollable urge to buy something.
Origin: From Latin, from Greek xnios for sale + mania
Oniomania afflicts most people who visit Amazon.com.