Investment Changes after the Market Crash
The recent downturn in the economy has caused many people to question their investments, including myself. Here is a short summary of my background. I graduated from university with a bachelor’s degree just over a year ago. Since then, I have been in the “working world” getting paid a salary for my work week, just like many others. Thanks to graduating with no debt and keeping my living expenses low, I was able to start investing some money within just a few months of working full-time. In hindsight I wouldn’t have started investing so early, but that is what I did.
I started a 401k and also fully funded a Roth IRA for 2007 since I had enough income as an intern for that year. By September I also fully funded my Roth IRA for 2008. All in all, I had invested $12,000+ in a fairly short amount of time. Most of this money was in stocks, as is suggested for someone my age who is investing for retirement. I also “diversified” by investing $3,000 in Vanguard’s Total International Stock Index in a non-retirement account.
We all know what happened next, the stock market dropped severely. Here are a few pictures to illustrate. The first is from Yodlee MoneyCenter and the second from Vanguard.
The large jump in the Roth IRA just before the crash is a 401k rollover from changing jobs and a transfer from my non-retirement account.
On October 10th I decided I didn’t want to risk losing more than I already had and I transferred 90% of my Roth IRA from the Vanguard Target Retirement 2050 fund to their money market fund. Since then I have added to the risk by adding some bonds to the mix.
This type of investment change is exactly what most experts and advisers would say not to do. I just bought high and sold low! Well, it was at this point that I decided my cash savings was not sufficient enough to have this much money invested in stocks. One of the reasons I was so aggressive in contributing to the Roth IRA is because I knew I could always withdraw the contributions tax-free if I had an emergency and really needed the money.
Since the crash, the only money I’ve invested in stocks has been in my 401k. You might notice that the curve on the purple line that represents this above is getting a bit flatter. That is because I’ve been steadily lowering my contribution percentage to the 401k. I have decided that I would much rather have cash in savings rather than money invested in anything with a large downside risk at the moment.
The reason for my new found desire for a large cash savings is two fold. First, I think that an emergency fund with 12 months of living expenses is probably not a bad idea. With unemployment climbing it seems fairly reasonable to have a fund of this size rather than the more commonly suggested 3 months or 6 months. My other justification for hoarding cash is actually representative of my new investment strategy.
This new investment strategy is the thought that perhaps I should be investing in myself instead of others. I’ll expand on this more in future posts, but it is a thought that has been guiding many of my recent decisions. The traditional thinking might be that putting away money early for my retirement in stocks and bonds is investing in myself and my future. However, that doesn’t ring entirely true. I am investing for my future in this way, but I am actually investing my money in hopes that others will make financial progress and increase their value. In that sense, I am not investing in myself.
I have not decided to do anything radical, but this thought will shape my investments in the future. I plan on continuing traditional investments in stocks and bonds once I decide I have enough of an emergency fund, but probably in a reduced capacity. Therefore on this site I will write some about these traditional investment methods, but I am also very interested in exploring alternatives. Right now the main alternative I am considering is saving money to invest in a business of my own, rather than investing in other people’s businesses.
Feel free to post any thoughts in a comment below!
That is unfortunate how that all played out, and i agree totally with investing in yourself! Not that investing is a bad thing, but i hate the thought of putting my money on “here say” and random specuators ideas. I consider it more as gambling than investing. Investing in youself is what more people should do. Save money and start a business. If you fail the first time, try again. I failed with my first business. The reason why; not enough capital. I am currently saving up for another go at it and hope to launch by august 2010. And never be afraid to fail, because often you learn more than if you succeed.
Great to hear from you again!
Saving money to start a business is exactly what I meant when I was talking about investing in myself. It is just strange to think about investing in stocks and bonds which is essentially investing in other people and hoping that they do well financially. You don’t have any control over what happens. Its quite possible that these other people do better than yourself would do with the money, but who knows?
Right now I would say I’m about half invested in the normal retirement / market thing and half is money saved to hopefully develop a business of my own.
As far as investing in the stock market, a few key players are sayng we may see the real crash in 2010-2011. 5,000 may be the bottom for the DOW. Oil, gold, silver, and real estate will continue to be good investments in 2010. Predictions of close to 2k for gold, $25 an ounce silver, and oil up to $90 a barrel by the end of 2010. Also if Isreal attacks Iran expect to see oil go through the roof. If the fed raises interest rates, the stock and real estate markets will collapse. Kind of doomsdayish stuff, but if you have your money in the right place, its heavenly. But this is only “here say”
Me personally, i’m looking to invest 25% in oil, 25% in real estate, and 50% in my business this year. We should see the next wave of the real estate crash hit later this year and have a much stronger impact on the commercial market, and would love to dive in there.