Thinking About Money

With all the uncertainty in the market and talk of recession, I thought this would be a good time to cut through some of the noise and panic take a quick look at some underlying trends and what they mean to investors. Hopefully you’ll find this helpful in your own investing and financial planning. The following is a quick summary – I’ll probably tackle some of these issues in more detail later.

Housing: Yes, housing prices have dropped and yes, this year’s greed sparked financial crisis is the sub prime mortgage mess. If you followed earlier advice and stuck with a fixed rate mortgage, you can just stay put. Housing prices in most places were not a bubble and will recover. Why? Because the U.S. is experiencing population growth. That means demand will catch up with supply. When? It wouldn’t surprise me if it’s a few years. Strategy? Stay put if you can, refinance to fixed if you have an adjustable.

The Dollar: We continue to borrow and spend, which means we need to keep selling dollars internationally (to China, the oil states and foreign investors). Obviously the dollar will continue to drop. It’s a fine balance: reducing interest rates to stimulate the economy also reduces the value of the dollar, making oil and foreign goods more expensive which leads to inflation. Keep some foreign exposure and investments in international funds and bond funds to protect against the falling dollar.

Natural Resources: You do have money in some natural resource funds, right? It’s still a good place to be. How is it that oil is reaching record prices during a recession? It’s partly because the dollar is dropping. But it’s also because any slowdown in the U.S. and Europe is more than offset by demand grown in China and developing countries. This is a good long-term investment. If you’re driving an SUV now might be a good time to downgrade to a smaller high mileage car or hybrid. Auto prices won’t go lower, but gas will continue to trend upward.

Investing: Unlike 2002, the stock market is not overvalued: PE ratios are average on a historic basis. Traders are bearish, which means the market will trend downward, but this will just open buying opportunities for the wise. Wait until everyone is crying about how terrible the market is – that’s your buy signal. Inflation is trending upwards – this will increase the perceived value of stocks (stock prices rise with inflation along with all the other numbers in the balance sheet). Look for companies that earn revenue in other currencies (multinationals) for better results.

Basic Financial Planning: As always, build a cash position to cover you in the event of a job-loss or crisis. Get out of high interest credit cards – in fact, get out of debt completely if you can. Grab a free credit card that pays a bonus for incremental savings. And never invest anything in the market you aren’t willing to lose, or wait a long time to recover.