Last week, I held a special call-in show to focus on the new world we find ourselves in, from changes in the economy to challenges in the stock market. So, I thought I would give a recap of my discussion in case you didn’t have a chance to dial-in.
I began the call painting by the picture of where we are today regarding the economy and the markets.
I don’t think it requires much detail to give everyone a sense of what the economy is doing right now. You don’t have to be an economist to see the loss of business, loss of wages, and the insanely volatile market we have seen over the last 30 days.
Though things have settled down a bit, the kind of volatility has taken the breath away from even the most seasoned investors.
I focused more on the market because so many Americans have a stake in the stock market—either through your 401k or your IRA or even your pension plans (which also invest in the stock market although you really don’t see it).
In my opinion, the markets have reacted appropriately in many ways. The object of the market is to give investors a place to buy and sell their investments. I know this sounds too simple, but when you boil it all down, it is that simple. It is not so much a stock market as it is a market for stocks, like a market for corn or wheat, a place to sell and buy at a given price.
What is the price? It is a number agreed to between buyer and seller. If both have confidence in the future, the price will reflect that; if neither has confidence in the future, the price will affect that also.
Thirty days ago, there was no confidence in the future. Period.
But something else happens in periods like this. If there are only sellers and no buyers, markets could freeze up. It’s this freeze that is most dangerous and puts the economy in its most precarious position. It is the precursor of a serious economic decline and can cause a depression.
If the market operated in a vacuum, a freeze could be devastating. But fortunately, the market does not operate in a vacuum and there is something that can be done. It is called Government Intervention or Stimulus. Since the government has the ability to print money, it has the greatest financial power in the country—it can pretty much do anything it wants.
And do something it did.
It announced that the U.S. Central Bank will buy unlimited amounts of Treasury bonds and mortgage bonds to help ensure that the markets function properly.
It also set up programs to ensure corporations and state and local municipalities could have access to credit
Did this quiet the market and prevent a freeze-up? Yes! The market reacted positively, signs of stress in the corporate debt sector eased, bond funds rallied.
But Wait, That’s Not All
Congress can also do something. And do something it did.
So with this backdrop, here is a rundown of my discussion on the call’s talking points. My first point I posed was:
What Should One Do If The Market Keeps Going Down And Stays Down?
Well, what does down really mean? The Dow Jones Ind. Avg. high for this year was 28,538. One year ago, it sat at 26,000 and as of last Friday, it stood at 24,000.
The last time the Dow approached 24,000 was on December 24th, 2018. I remember it not so fondly as one of the worst Christmas gifts ever!
So, if the market stays at this level for a while, what does that mean to you? No appreciation for a few years. I used to call a market like that a “RoomsToGo” market, back when Rooms To Go used to offer 0% financing for ridiculously long periods. No gains for 24 months? The question is: Will that affect you?
That’s why you should have bonds in your portfolio. Use the income and some of the principal from the bonds to pay your income needs as you wait for the market to restart its climb.
Next, I focused on:
Increasing Your Cash Flow and Securing A Steadily Rising Income Stream
This is a favorite topic of mine. Here’s how I explain it. First, imagine you are in a boat going up the Intracoastal and you get to a low fixed bridge which you can’t get through. There are only 2 choices to get to the other side—either you raise the bridge or lower the water.
This metaphor relates to your cash flow as well—you either have to produce more income or you reduce spending.
Increasing the income on your portfolio is one way to win this battle. Stocks have shown overtime to be a great source of increasing your income. As economies grow and businesses make more, they pass that along to you in the form of higher dividends. If you are diversified, history has shown that your income from these stocks will increase over time.
I also focused on what you can do in these crazy markets to keep your head on your shoulders.
Stay Calm And Carry On
First, you need to understand that money is an emotional thing. It is tied to your sense of well-being, security, and it definitely makes life better. The old Chinese saying: “No money-No Life” is pretty much true.
So, when you get markets that shake you up, here are some of the things you can do. These are some of the things I DO!
- I turn off financial TV. This 24/7 drumbeat of market-action-news can make you crazy or even worse, unhappy. And if you act on what they say, they can make you Poor!
- I don’t check my account every day. I know the market is down, so why do I need to know the exact dollar value of my savings?
- I go back to the investing books I love. I’ll re-read Berkshire Hathaway Annual Reports.
- I’ll redo the math on my accounts, double and triple-checking that I’ve made the correct calculations about my sources of income and excess cash or bonds to make sure I’ll be okay
- I’ll have my team of advisors rerun the software that I mentioned before to see where I stand and to see if my situation is getting close to a red zone.
After all this is done, after I have dotted the I’s and crossed the T’s, I stop worrying and get back to living.
I had asked attendees to write in their questions, and write in they did!
We recorded my answers so now I am going to play it back so you can hear the actual recorded call. Go here to listen.
Hope you enjoy. Also, don’t forget to sign up for our weekly update at stevepomeranz.com so you won’t miss the next call as we navigate these tricky times.
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