Finances and the stock market for the rest of us

Over the past three months, I’ve been meaning to come back here and talk a lot more about knitting – and I will get back to that, for sure!  (See end of post, OK?)

In the mean time, I’ve been thinking and talking a lot about personal finance, and beginning to get serious about learning about the market and keeping tabs on what I need to know.  I thought I would share a few simple points here for a general audience, such as my friends and colleagues who usually look at me with a blank face when I bring up the market or investing or retirement.  Hopefully you as that audience will keep in mind that I am just a layperson reading my magazine, tracking updates online, and listening to podcasts.

Correction or bear market?

The main thing I’ve learned is that right now, the market is in a corrective phase, which means that people and corporations predicted much higher future values of companies and commodities than have actually been born out.  Now, the market is adjusting itself downward to reflect the true value of many of these stocks.  If it stabilizes around a 10% loss, it will be termed a “correction.”  If the market continues to fall toward 20%, we will hear economists and commentators talk more about a “bear market.”

I just learned that we are a couple months shy of what is considered a very long “bull market,” almost seven years, with unprecedented highs and increases in overall numbers of shares purchased.  So it should not be a shock that some adjustments are now in play, particularly given global volatility, including in China.

Playing it safe

Because continued volatility is anticipated for 2016, I’m hearing and reading a lot about putting investments in cash or cash equivalent funds to ride out the market’s downward trend.  This could be a money market account, a short-term CD, or a short-term bond fund.  I have just moved around 60% of my total investments into money market accounts, and I’m considering moving the rest.  With my retirement accounts, which include an employer-sponsored plan and a Roth IRA, there are some restrictions in movement.  I’m not forbidden from taking funds out of the money market accounts and putting them into new funds, but I am forbidden from putting that cash back into the previous funds for one month.  This doesn’t worry me, because I think we’ll be seeing volatility for some time.

I’ve recently seen a ~9% downturn in my investments, so I want to halt the loss at that point.  Overall, I’m confident that I’ll regain that money, but I don’t want the loss to continue to 20%  before I have a chance to see the market turning around.  Given my age (late 30s), most of my investments were still in relatively high-risk funds.  So, I’ll sit on cash until the signs point up.

What are bond funds and why do I care?

One really important point, especially for older investors, is to consider and reduce how much of your money is invested in bond funds.  I’ve been hearing and reading about this on various fronts, including in a Suze Orman book published in 2012, so it is not a new concern.  Even I have been socialized to assume that bonds are “safe,” but “bond funds” are not the same as bonds.  The only recommended investment that I’m hearing about now is in short-term bond funds, and only if an emplooyer-provided retirement fund doesn’t give us money market accounts as an option, because otherwise there is a significant probability of loss on investment in longer term bond funds as interest rates rise.  We are finally seeing the Fed indicate increases in interest rates, so it is pretty much a guarantee that you’re set up for future loss if you have substantial investments in bond funds.

[My brain has not solidified the “why” of this argument, but I’m sure there are lots of online resources that can explain it.]

The other really important point about bonds is that if you continue to invest, in addition to looking at short term bonds, high quality is essential.  High-yield is not the same, and basically means that the price of those bonds is falling – which, if you do the math, means you’re going to be losing.  (The price is lower, and the earnings may be stable, so when you divide the earnings by the lower price, the yield comes out higher.  This doesn’t say much about the overall value of the investment, which could be plummeting.  One source said that “high yield” is simply a way of saying junk bonds.)  High quality bond funds usually explicitly have “high quality” in the title.  They may have a lower yield, but are overall a safer bet because they are stable.

Don’t take the easy way out – do a tiny bit of research

I found out that I was invested in bond funds through my “Target” retirement fund.  It’s worth making the effort to find out what is included in these packages of investments with an attractive title that are easy to plop our money into without thinking.  I’ve already taken 75% of the money that was in my “target” fund out, and put it in cash, and may do the same with the remaining funds.  When the market turns around, I will probably still look to be well-diversified through an easy “fund” investment, but it may be one that represents the overall stock market, like S&P 500, rather than one that is sort of hiding bond fund investments from me through my own lack of research because I wanted the easy way out.

I’ve gone on for a while now, but this is really essential stuff for anyone that works and puts their hard-earned cash in any investment, i.e., somewhere that isn’t only a savings account at the bank.  We need to be informed enough to preserve those investments and protect our future to the best of our ability.

The Knitting Portion of the post

Now, knitting porn:


Ravelry project link

Washcloths made with Fibra Natura Flax yarn, to go with holiday gifts of locally made soap and lotion.  I like to stick with stockinette stitch, because it doesn’t feel as rough on my face as some other stitch designs involving purl bumps.  But I tagged them with a little cable design in the corner.


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