When the Road to Investing Gets Bumpy

Investing in the stock market is a lot like driving on a long road trip.  At some point, you’re going to run into pot holes and rough patches.  When that happens, you should definitely drive with more caution, but you have to keep on going if you want to reach your destination.

Similarly, if you’re investing for long-term goals such as retirement, you will encounter some market volatility, probably several times along your journey.  While you may be tempted to pull over and wait out the rough times, it will delay or may even prevent you from reaching your goals.

So what should you do when the road to investing gets bumpy?

Buy Low, Sell High:  The whole premise behind investing is to buy low and sell high.  You can’t do that if you pull out of the market or stop investing when the market goes down.  If you’re investing for the long-term, you should be glad when the market is down, because then stocks are “on sale” and you can pick up more shares at a lower price.  Who doesn’t love a good sale?

Diversify: One of the best ways to defend your portfolio against market losses is to have a portfolio that is properly diversified.  If you review the history of the stock market, you’ll see that the best performing assets vary from year to year and that it’s not easy to predict which asset class will perform well in any given year.  Therefore, by having a mix of asset classes, based on your risk tolerance, your goals and your timeframe, you are more likely to meet your goals.  In addition, having a mix of asset classes reduces your risk of loss, since you won’t have all of your eggs in one basket.

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Smart Money Moves to Make in Tough Times

The recent financial news – banks failing, the Treasury taking over Fannie Mae and Freddie Mac, the stock market dropping several hundred points in one day – may have you feeling a bit helpless when it comes to your finances.

While you may not be able to make the market go back up or keep banks from failing, there are steps you can take to make your finances as strong as possible in these tough times:

1.  Fund your emergency fund.  It’s more important than ever to have an emergency fund, in case you lose your job, have unexpected medical expenses, or have a major house repair, so that you don’t have to sell investments (while they’re down), or rack up credit card debt.  The general rule of thumb is to have three to six months of living expenses set aside for emergencies.

2.  Reduce debt.  If you have high interest credit card debt, the greatest return you can get right now is to pay off that debt.  Start by calling your credit card companies and asking for a lower interest rate (if you have a good credit score, you could get your rates down to 8-12%, which is much better than paying 20+ percent).  Then make the minimum payments on all of your credit cards except the highest interest rate card until paid off.

3.  Review your spending.  I’m always amazed at how many people have no idea where their money is going each month.  How can you reach your goals if you don’t know where your money is going?  If you aren’t already doing so, now is a great time to start tracking your spending using a software program (such as Quicken) or even spreadsheets that you create on your own.

4.  Increase your retirement contributions.  Many people panic and stop investing in their 401Ks or other retirement accounts when the market is down.  When the market is down is actually the best time to invest.  Remember “buy low, sell high”?  Well, the time to buy low is when the market is down!  Make sure that you are investing in a diversified portfolio that meets your risk tolerance, time frame and goals, and that you rebalance once a year.

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Keeping Your Money Safe

With everything going on in the financial world lately – the Treasury taking over Fannie Mae and Freddie Mac, the collapse of Lehman Brothers and IndyMac Bank, and the government bailout of AIG – it’s no surprise that investors are wondering if their money is safe.

Thankfully, there are safety measures in place for various types of accounts and investments.  Here is a rundown of the different safetynets in place for each type of account or investment you may have:

Banks:  Bank deposits are ensured by the Federal Deposit Insurance Corporation (FDIC).  Basically, the FDIC insures deposits up to $100,000 per owner, per bank.  If you have $100,000 or less in your name at any FDIC-insured bank or savings association, you have nothing to fear.   Since the limit is per owner, that means you could actually have more coverage than you think (for example, if you and your spouse have a joint account with $300,000 at one bank, $200,000 is insured – $100,000 for each “owner”).

In addition, if you have certain types of retirement accounts, such as an individual retirement account, you’re eligible for even more coverage – up to $250,000 per owner, per bank.  However, the FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities and municipal securities, even if you bought those investments at an FDIC insured bank.

If you want to make sure that your deposits are below the FDIC limits, please visit EDIE The Estimator.   EDIE the Estimator can calculate your FDIC insurance coverage for each FDIC-insured bank where you have deposit accounts.

Credit unions have similar coverage through the National Credit Union Administration (NCUA).

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Key Provisions in The Housing and Economic Recovery Act of 2008

On July 30, 2008, President Bush signed H.R. 3221, the Housing and Economic Recovery Act of 2008 (the “Act”).

The Housing Act is intended to revamp the housing finance industry, encourage home ownership and help prevent foreclosures. Below is a summary of some of the tax provisions in the bill that will affect current and future home owners:

* The Hope for Homeowners Program: The Act creates a new Federal Housing Authority (FHA) program designed to help borrowers in danger of losing their homes to foreclosure. Eligible homeowners may be able to pay off their original (foreclosing) lenders with a fixed-rate, 30-year-term mortgage for up to 90 percent of the appraised value of the property.

Eligible homeowners are those who originated their loans before January 1, 2008, spend more than 31 percent of their monthly income on their mortgage, and are currently in danger of foreclosure. Borrowers would have to share future equity with the FHA. The program is completely voluntary; banks may elect not to participate. The program begins on October 1, 2008 and ends in September of 2011.

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Jump Start Your Finances

Introducing a new consulting service: Jump Start Your Finances

Are you:

• Overwhelmed by your company’s 401K choices?
• Confused about investment products?
• Living from paycheck to paycheck?
• Saving enough to meet your financial goals?
• Getting all the tax deductions you are entitled to?

Jump Start Your Finances is a consultation session for younger individuals and couples, who have important questions about their finances, but who may not yet need a written financial plan.

The Jump Start Your Finances Consultation will teach you:

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