Tuesday, October 28, 2008

Husband's E-mail on Investing

Husband here. Wife Esq. has been bugging me to post this for a few days now--my e-mail to one of her friends, answering a question about investing. (I'll leave the individual in question nameless, though she can feel free to out herself in the comments if she likes.)

Wife's friend wrote to me asking what she and her husband should do about their 401ks given the markets recently--their accounts had gone down by an alarming amount. (Join the club.) He wanted to stop contributing and put the money in a money market account instead, then invest later after things calm down. She wanted to stay the course, and saw the benefit to getting more shares while they're cheap.

In retrospect, I could have made some other good points about losing tax benefits and posing the question "Are you REALLY going to save that money and invest it later, or just spend it?" Instead, I focused on a bigger-picture point: anyone like us (30s, two good incomes, a couple of kids...now or on the way) should be viewing this crisis as an opportunity.

Anyhow, here's the e-mail I sent her on Friday morning, edited only slightly for anonymity's sake. I wish I had posted this yesterday, before today's 10% jump...I hate looking like I'm just posting because I was right in the ultra-short term, since that's about the exact opposite of my point. I guess that's what I get for procrastinating when Wife tells me to post something.

Going to cash now would be the biggest mistake you could make. You would be missing the greatest wealth-building opportunity our generation will ever see.

You should be almost 100% in stocks, regardless of what happens in the market today, or tomorrow, or next week. Why? You have a very, very long investment horizon--you won't be actually doing anything with that money for another 30 years at least, and you're looking for it to continue growing in the stock market for at least the next 45 years. Your biggest risk on that time scale isn't market losses, it's inflation. A money market account gives you a "safe" 3% or 4% return, but at best that keeps you about even with inflation. In other words, your money isn't really growing--you have to take on some risk to beat inflation. But that risk is mitigated by the long period you have to make up for any momentary reversals.

I would give different advice to someone in our parents' shoes or our grandparents'. In the case of our parents' generation, they actually need that money fairly soon, so they can't afford to be super aggressive. And our grandparents would lose immediate spending power from this kind of loss, so they need to be even more careful.

But for us, this is a fantastic opportunity.
  • Even if you don't have a stash of cash that you're willing to dump into the market, you have a regular, non-trivial amount of surplus income--all you have to do is direct it into stocks instead of cash. (Or just do nothing, if it was already going to be going into stocks, like your 401k--all you have to do then is not change anything!)
  • You have long investment horizons--40 years or so to retirement, 20 years or so for your kids' college funds. You can afford to mis-time the market a bit. Even if you invest today and it keeps going down for another month or a year, or if the market's flat for the next 5 years, you'll have plenty of time to make up for that.
  • Most assets are held by our parents' and grandparents' generations--and they are (somewhat justifiably) panicking. They're dumping shares, corporate bonds, everything, and going to cash or Treasurys. EVERYTHING is taking a beating...which means everything is cheap for those of us with some cash to buy it. This means you don't even have to be very smart about picking the right place to invest. When everything is cheap, almost any investment is likely to pay off in the long term. A monkey throwing darts would make bank right now. (Assuming the monkey had cash to invest--point 1--and had a long-term view--point 2. I don't know if this is actually broadly applicable to monkeys.) If you're invested in a few broadly diversified mutual funds, you're in fine shape.

Incidentally, I've been following my own advice. Since about the last week in September, I've been dumping lots of cash into 5 different mutual funds, plus our 529 plans. Our cash hoard was sadly depleted by our landscaping, AC installation, and baby nurse spending, but I've still managed to put [about a month's take-home] into play. Most of it has lost money at this point, but I'd rather be a little early than too late. I'm planning on continuing to invest [about 10% of our monthly take-home] a week until we get down to a minimum acceptable level of cash, or the markets recover, whichever comes first.

One other thought--do you have any money in non-retirement funds at this point? If so let me know--I have some additional tax-related advice there. [She didn't, but basically this advice would have been: dump your losers, and buy similar but not identical funds/stocks. This way you get to claim the tax loss this year, but stay in the market while avoiding wash-sale issues.]

Oh, and one last thought. Investing in a 529 plan NOW would be a great move. Open it listing yourself as the beneficiary, then change the beneficiary to your kid once he's born. That way, any gains you make from this awesome opportunity will be tax free!

Anyone who wants in on the Husband Financial Advisory Network, let me know. Very reasonable hourly fees, payable in beer or whisky.


Stacey said...

Thanks, Husband! DH and I have followed your advice. It still hurts to see 40% of our retirement disappear but we'll keep investing with the hope that everything will shape up and we'll end up being able to retire before a lot of other people who are scaling back on their retirement. Glad to see that my quesiton to you sparked advice for others...

Natalie said...

i feel comforted by your message, especially since I am a monkey.

LauraC said...

Love the (free) advice! Keep it coming!