Unless you’ve been living in a cave, you’ve undoubtedly heard about the turmoil in the global financial markets and the dramatic plunge in stock prices that took place over the past week. But while there are a lot of big, scary headlines out there, I haven’t seen very much in-depth analysis to help folks get a better understanding of what’s happening and, more importantly, figure out what to do with savings and retirement accounts that include stock-owning mutual funds. Because I have some brokerage accounts at Charles Schwab, I receive articles from their staff which I have found informative. Here are links to two of the articles, which can help you get a better handle on what’s happening and determine how best to respond.
The first article is the best analysis I’ve seen on the current financial crisis and what’s driving it. The second article compares this crisis to the Great Depression, to give some perspective on what we’re going through. The bottom line is that, while we’re probably in for some tough times ahead, there’s no reason to think we’re headed for a depression. The reason is that many more safeguards exist today than were in place prior to the Great Depression (including FDIC insurance for bank deposits), and, more importantly, our government is willing to use some big guns to avert a real calamity.
If you haven’t done so already, you may want to consider moving some of your investments from stocks into bank CD’s, at least for the short-term. I say “some investments” because selling stocks now will lock in current losses and you may lose out on a rebound. That said, I believe we have yet to see the bottom of the market crash and are probably at least 2-3 months away from the point at which the credit markets are going to start flowing again, which is key to both an economic recovery and an increase in stock prices. On the other hand, if I were contributing to a retirement account (and still 15-20 years away from needing the money), I would probably start buying some equities, because last week’s correction, if nothing else, probably put stock prices closer to their true value, which was inflated due to the over-availability of easy credit.
The scary part to all this is how the general economy will fare and whether measures taken by the Treasury and Federal Reserve will have their desired effect. Most of us will need to live more prudently, cutting back on unnecessary expenses, reducing debt levels and increasing personal savings. That will also have an impact on the economy, which has become overly dependent on consumer spending, but it is probably the best strategy for buttressing your household finances in times of economic uncertainty.