Thursday, March 12, 2009

Don't Be Blindsighted By Short-Term Trends

Tip # 89 - Don’t Be Blindsighted By Short-Term Economic Factors. Remember when gas was over $4 per gallon? How about when real estate was going through the roof? Or think back a few more years and try to remember when the stock market was reaching all-time highs every day.

Many people think about what is going on today. That is all they hear about on the news. That is all anybody talks about around the proverbial water cooler. And that is all anybody reacts to when they think about how they should take charge of their finances.

Gas is $4 per gallon. Buy a Smart car. Real estate is skyrocketing? Buy a house, fix it up and sell it. Stock market is going up and up? Invest in stocks. Unfortunately, people are reacting to short-lived trends in the market and the world around them - trends that won’t necessarily last.

In the early to mid 1990’s when stocks and mutual funds were returning 15% a year, that is all people spoke about – how great the market is, how everyone should be in it and the more you put in the better. Fast-forward about 10-15 years and the market is down at its lowest in years. Now all we hear is that the stock market isn’t safe; it was always risky and we need to look for safer investments.

Let’s look at the real estate market. Five years ago, the market was reaching unparalleled heights. Buy, buy, buy. You couldn’t go wrong with real estate. And people bought. Some who turned it around in the short-term did fine. Others, who did not, got caught. They were caught in the buying frenzy and now their real estate is worth much less than they paid for it.

Lastly, let’s look at gas prices. Do you remember all the talk of hybrid cars? Electric cars? Smart cars? Those were the answers to $4 and climbing gas prices. Some people got on waiting lists to buy a Toyota Prius. Others sold their SUVs, while still others bought Smart cars. Where are gas prices now? In my area they are under $2 per gallon.

My point? There are always trends, fluctuations, or happenings in the world around us that are short-term or temporary. Try not to be swayed by them. If you believe that the overall trend in gas prices is going to go up over the next 10 years (or if you care about the environment), then by all means buy a hybrid or electric car. Don’t do it because gas is currently $4 per gallon and it’s all hyped up in the news.

If you start buying stocks when they are going up, up, up, then you are buying at the highest price. If you avoid them when the stock market is looking grim, then you are missing some buying opportunities (a sale on stocks!). Instead, plan a long-range strategy with an appropriate percentage of your savings that you are comfortable with invested in stocks.

Lastly, buy a house when you are ready to buy one – not because everyone and their neighbor tells you it’s a good investment and you are missing the boat if you don’t buy one. On the other hand, don’t be dissuaded by the recent real estate slump. It’s temporary. It won’t be this way forever. If you want to buy a house and you are ready, it’s probably a very good time to do it – with so much inventory and people ready and willing to sell and negotiate.

In other words, make a plan – an investment plan, a real estate plan, even a car-buying plan. Base it on sound long-term trends and needs that fit your situation – In general, diversifying your investments will keep you from being hit too badly if any one area takes a nosedive. Be proactive, but realize that you cannot predict what will happen in the future – short- or long-term. Don’t react to current news of the day. Even if it last for months, wild fluctuations do not last forever.

In Real Life (IRL) – I started investing in the early 90’s when stock markets were going up and up. I, understandably, had dollar signs in my eyes when I calculated my future net worth based on current returns. This trend went on for a few years. And then slowly, things started changing until now when it seems we’ve hit rock bottom for the stock market. I will say, that I was never a huge risk taker, so I never moved all of my money into stocks based on how well it was doing. Fortunately, I always had a large percentage in fixed income and conservative investments. It has made me much happier in this down market. But at the time, I thought the stock market would always perform that way. It was all I knew. And now I know better.

Regarding housing, we were fortunate to buy our house before the housing sky rocketed, only because we bought when we needed a home. We didn’t really take into account the market conditions, and we lucked out because the market was relatively low when we bought. However, we did get caught up in the up, up, up housing market a few years ago. My parents own a condo in Florida and prices were suddenly going sky high on them. We tried to convince my mother-in-law to buy one, but she couldn’t afford it on her own. So we decided to buy it with her, so she could live there, and it could be an investment for us. Well, we can all guess how that turned out. The condo is worth about 2/3 or maybe less than what we paid for it. On the bright side, my mother-in-law got to enjoy the last five years there and the condo was very cheap, so we really didn’t lose too much (we don’t plan to sell anyway). But we got caught up in the real estate hype, and I have learned a lesson I don’t want to repeat.

As far as cars, I do hope to buy an electric or hybrid car someday, but because I believe they are better for the environment not because of the short-term gas prices. I wasn’t in a position to make a quick change in cars when the gas prices were going sky-high anyway.
Overall, in times of great declines and in times of large increases, keep levelheaded about why you are investing or buying or selling. Think long-term and make sure you are not reacting to short-term current market trends. You will do much better overall.

1 comment:

Ashley said...

You left a comment on MSM's blog re: using your old cell phone to call 911. Could you explain that to me? I didn't know you could use them after you canceled the plan. Thanks!