Posted on 09/29/2008 5:42:09 PM PDT by 2ndDivisionVet
Rather than panic, follow these tips to pass the time wisely while Congress gets its act together and approves a financial-bailout package.
While Nancy Pelosi is blaming our financial meltdown on Republicans, and Republicans are getting even by voting down the $700-billion financial-bailout package -- and while panicked investors react to the congressional backstabbing by sending the Dow Jones industrial average down a frightening 778 points -- I get an e-mail from my friend Clayton.
Clayton is about to retire. He lives in a small city in the South and figures he could live comfortably the rest of his life on his savings, which are mostly in the stock market. Now Clayton is beside himself that his savings are being set afire by the dithering politicians.
He asks me what to do -- sell everything is his preferred course of action. The way stocks of good companies were being thrown out the window on September 29, a lot of people felt the same way. Maybe you are one of those who also think the world is ending.
I agree -- it's hell to sit still while the world ends. So I am going to suggest six things you can do, right now. Sensible things. Constructive things. You'll stay busy and time will pass faster. By the time you've finished these six tasks, I predict, Ms. Pelosi and the House Republicans will have resolved to behave better and passed the legislation.
When the Senate does the same and this bailout actually occurs, we'll all feel much better. It may even solve a problem or two. So here's what to do.
First, do anything, but do not look at your investment-account balances. What you see would just upset you. Take a long walk instead. The thing is, now is not the time to lose your cool completely and sell assets that you thought were good investments a week ago. They undoubtedly still are good investments.
Second, if you ignore my first suggestion and look at your account balances anyway, you may discover that you are not fully invested. Maybe there's some cash in your accounts. Cash gives you several options. One of them is to make a lot of money in a really safe investment, like a money-market fund.
When the Reserve Fund, the nation's first money fund, "broke the buck" two weeks ago and repriced its shares at 97 cents instead of the usual $1, institutional investors in particular began a run on money funds. To stop mass redemptions, the government took the unusual step of offering to insure money-market funds, including tax-free MMFs. As I write this, Alpine Municipal Money Market Fund (symbol AMUXX) is showing a seven-day annualized yield of 6.51%. For someone in the 35% federal tax bracket, that's the same as a 10% taxable yield. Ladies and gentlemen, I've never seen low-hanging fruit of this sort. Alpine says it is considering buying insurance on this fund.
Third, maybe you looked at those account balances and are outraged -- yes, made madder than hell at the disrespect other investors are showing the great companies whose stocks you own. That's exactly how I felt. The first thing I did on September 29 was sell a stock that had barely budged that day but that I had no great feeling for anymore, to raise more cash. Then I used some of that cash to double up on two stocks -- one a bank, the other an energy provider -- that had been beaten to a pulp. But I held some cash in reserve, because there's always tomorrow.
Fourth, maybe you looked at those account balances and found cash on hand, but you don't like the idea of 10% money-market returns or doubling up on stocks you already own. Maybe you're one of those people who smell an opportunity to own new positions in really good stocks at bargain prices. If so, you don't need to read the rest of this commentary because you don't really believe the world is ending, do you?
I note that Microsoft (MSFT) lost almost 9% of its market value on September 29, closing at $25.01. In other words, you are being offered this stock at a 9% discount to its already discounted price. This is a company that accumulates tens of billions of dollars a year in cash, which it throws back at shareholders in the form of higher dividends and larger stock buybacks. What's not to like about that?
International Business Machines (IBM) saw its price decline $5 a share, to $114.46. That's less than 15 times its earnings the past 12 months. The mighty Burlington Northern Santa Fe (BNI) took a 7% hit, to $91.04 (disclosure: I own shares of this railway). Great companies are on sale! Perhaps you should be a buyer.
Fifth, get a haircut or a manicure. By the time you get there, get it done and get back, you'll have killed at least an hour. You'll look better. You'll feel better. All the more time for Ms. Pelosi and the House Republicans to reconsider their actions.
Look, it burns me up, too, that we taxpayers are risking $700 billion to undo the poor judgments of the mortgage lenders and investment bankers whose excessive greed got us into this fix. But we've got to get the rotten fruit out of our financial orchard or we'll be in an even worse fix tomorrow and the day after and the day after.
Which leads to my sixth suggestion: Think nice thoughts. Think of trout jumping in a stream. Think of the last really great meal you've eaten. Think of the thousands (more likely, tens of thousands) of investment bankers and mortgage brokers who are out of work today, and of how our country is so much safer as a result. Do anything, but don't sell your investments today, at the bottom, in a snit or a panic. My friend Clayton is holding steady. He e-mailed me just now to say he's staying the course.
Well, one of them has to be F***.
Got the name of a good boat?
“The world did not end today. Yes, the market took a pretty nasty dive, but it will recover more quickly if we don’t allow Congress to once again put its nose in and “help.” The market will correct itself. Oil is down. Dollar is up. We just need to ride this out and let the teetering institutions fail and capitalism will prevail. We must continue to say no to this Socialistic bail out in whatever form comes next.”
I agree with you totally! Now if McCAin will only take the opportunity to lead and say the best thing to do is cut Capital Gains Tax and and let the market correct itself. He would win for sure in November if he did!
Clayton, meet with your neighbors. Make plans to fortify your town.
The absolutely worst thing one could do is to sell stock in solid companies. Stock prices go up and down, but meanwhile they pay dividends, and while you are drawing those you wait til they go back up to sell. They will go up again.
The CDs would be FDIC insured, not sure about the AIG stuff.
Great flick!
Mebbe I’ll watch it tonight...
Should I feel sorry for someone who is realizing the risk inherit in the stock market?
Bonds have been taking a beating because of the sub-prime market. Your feelings are your own. I will not impose my beliefs on your feelings. (smile)
What did I miss in 10th grade econ?
Wow, a product of our education system that understands bonds and the basics of our education system! (I am NOT being sarcastic.)
You are correct. Most small investors buy Bond Mutual Funds because they can diversify and because nobody really wants their money tied up in a 30 year bond. Mutual funds give liquidity. Nonetheless, mutual fund or not, the base price a person is willing to pay for a bond depends on today's interest rate (among other things). As interest rates drop, the base price of the bond increases and vice-versa in a normal market.
When small investors put money in a bond mutual fund, the mutual fund manager selects the investment tools. Many mortgages have been packaged as bonds and resold to bond mutual funds (hedge funds too). The value of the sub-prime mortgages are difficult to place a value on, and the price someone is willing to pay for the mutual fund will therefore drop -- more if the fund is heavily invested in mortgages.
I hope that helps answer your excellent question.
We need to make more noise. We're slowly winning on Global Warming "Climate Change"; here things are compressed, but I still sense an increasing number of people are perceiving that the real "urgency" is "you need to act immediately, because the longer you wait the more likely you'll realize it's a scam."
The irony here is that I suspect that bond funds are more dangerous in this market than many types of equities. If many of the purchasers of some type of bond also bought credit default swaps to "insure" it, any shakiness on the part of the "insurer" will tend to undermine confidence in the bond as well. Some companies' equities will become totally worthless as a result of their having bought toxic paper, but many other companies' equities might escape relatively unscathed.
If I may, I would add to your list to remember that those who held on to their worthless stocks in the 30s eventually became quite wealthy. Some families, years later, would find some old stock certificates stuck away in a drawer, take it to wherever one takes old stocks, and found out that the certificates were worth a fortune. Just think, maybe we can make our grandchildren wealthy by holding out.
My grandparents have been in a three way panic for the past several days, and I made the suggestion that they should consider gold. Although I see in this thread further up that someone else suggested that already.
But I’m just the adorable grandson, what do I know?
Good to hear from a strong American woman.
I’m waiting till the DJIA gets to 42, then it’s buy, buy, buy!
There you go!
Buy @42!
(I have a buy in @ .15.....) Yeah, I’m a low-life bottom feeder.......
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