Managing my Money in a Bear Market: What's the Best Strategy?

I've gotten a series of money management questions from friends and family over the last few days in the wake of the recent stock market plunge. This morning, after receiving an email full of questions from another wise friend, I thought I'd post my thoughts addressing the most common questions I've been getting (and by the way, keep those questions coming---carefully researching and thinking through your options is the best way to prosper during rough times).

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So, my final thoughts:

Make sure your emergency fund is strong: stock away a 3-6 month minimum reserve---probably closer to six months in a bad economy. If you don't have this in place, consider either:

1. Splitting your savings in half (half going to dollar-costing and half going to your online money market emergency fund), or

2. TEMPORARILY diverting savings to your emergency fund and IMMEDIATELY switching back to dollar cost investing when you reach your emergency fund goal.

If you are comfortable with your emergency fund level, dollar cost right through this market and when you get extra money, make an extra purchase of the funds you are already on target to buy----or, if you REALLY have some extra, spend a little bit on a really cheap, but high quality stock that you strongly believe may go up in value later.

But *be careful* if you do this and understand that at some level, this is a gamble. Don't buy individual stocks with money you can't afford to lose.

My last few thoughts about managing retirement and emergency funds right now:

* If you can, resist the urge to take money OUT of the stock market at this time (in the form of drawing down from your IRA, 401k, etc.). This will make your "paper losses"---theoretical losses in the value of your portfolio---into REAL losses, and will keep you from benefiting from the bump when the market recovers. Bear markets are good times to put money into retirement funds and bad times to take money out of them.

* If you really get stuck and you have to take some money out---and I mean, if you MUST do this to survive----hit your Roth IRA first and your traditional 401k or 403b later. You can withdraw Roth IRA contributions without a penalty---you just can't take out any accrued interest. In general, 401k funds come at a much bigger price: they will cost you a 10% penalty for early withdrawal, and you will pay taxes on the money (for the second time, if you have a Roth 401k) to boot.

* If you can do it, make a plan to add to your emergency fund gradually and pay down debt bit by bit rather than drawing on your retirement funds. In the long term, this is a better strategy because of the reasons I've noted above.

Anyway, good luck! Only you really understand your options and current financial situation, so you must tailor your actions to that understanding. And finally, may you prosper with whatever you choose to do.

happy birthday, lovely sonofhephaestus!

Have a wonderful, wonderful day and know that I'm thinking of you.

So What *is* Dollar-Cost Investing, Anyway?

I've just been asked to explain dollar cost investing---a perfectly reasonable question with a critically important answer!

Here's what it is:

Dollar cost investing (also called dollar-cost averaging), generally means 'making regularly scheduled purchases of stocks or bonds'.

Usually it's done on auto-pilot. For example, I set up a series of automatic mutual fund purchases that come through my checking account on or around the 16th of every month. For one fund, that purchase amount is really modest: $50. But because I buy the fund online directly from the fund management group, and because I've set up automatic regular monthly payments, it's totally free. The fund management company doesn't charge me anything to do this.

Why is this a good idea?

1. Some months, the fund price is really low on the 16th, and some months it's a little higher. But over the long haul, the price will be lower often enough to allow me to buy more fund shares for less money than if I just made one big purchase at any given time.

So dollar-cost investing is a way of making sure that over time, I get more fund shares for less money.

2. Because I'm making an automatic purchase, it goes through on time no matter what else is going on in my life. This ensures that I make regular contributions to my long-term portfolio, no matter how distracted I might be during any given month.

3. I don't have access to a 401k or a 403b plan, so setting up my own little investment plan is a great alternative (it's also highly entertaining). Some of my automatic purchases go into my Vanguard Roth IRA and some don't. I'm mixing it up, since I can only put $5000 a year in my Roth and that's just not enough of a long-term investment for a 44-year-old woman to be making.

I like it on this planet, and I intend to stay for awhile. That means I am going to need enough money to pay my bills for a long, long time, I hope. So I've got to get crackin'.

4. Finally, in a bear market, dollar-cost investing in modest amounts is a great way for the not-yet-so-wealthy to take advantage of the 'blowout fire sales' that abound during these times. So although dollar costing is good in general, it's GREAT when the stock market is really tanking.

You can read more about it here:

http://en.wikipedia.org/wiki/Dollar_cost_averaging

"How can I tell if my bank is strong?"

Questions:

"I need to open a money market account for my emergency fund, but I don't know how to choose a strong bank in this volatile market. What do I do?"

"I've been listening to the news and hearing about recent bank collapses and acquisitions. How can I figure out if my bank could be next?"


My answer:

You can start by looking at bankrate.com's "Safe and Sound' ratings.

Bankrate.com rates each financial institution on a scale from 1 (strongest) to 5 (weakest). Like any ratings system, it has its own strengths and weaknesses and should be used with caution as part of a larger research effort. You can read about the system here:

http://www.bankrate.com/brm/safesound/ss_home.asp

To use the 'Safe and Sound' ratings system to check on a bank's rating, go to:
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Agent of Transformation and Change

Tarot Meme

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