During this challenging economic environment, it’s likely that you are growing more concerned about erratic market changes. These events are what history textbooks are made of and we’re all anxious about our investments and our future. I encourage you to stay calm and stay the course. With so much negative press bombarding us daily, the following summary helps make sense of what is really happening:
How we got here:Early in this decade, interest rates were lower than usual. Low-cost money perpetuated a quick rise in the value of homes across the country.
Lenders made it easier and easier to borrow money—even to people who should not have qualified (subprime)—further driving up the value of homes.
These insurance-backed subprime loans made it onto various balance sheets and later proved to be non-performing.
Interest rates were raised in 2003 causing adjustable-rate mortgages to increase drastically.
Faced with the inability to pay their mortgages, multitudes began to sell their homes. Unfortunately, this timed with the sudden halt of rising home values. As selling increased, house prices plummeted.
Lenders stopped refinancing; the default rate skyrocketed.
Investment banks holding the toxic subprime loans began to “write down” the value on their corporate balance sheets causing investors to sell off their shares in financial institutions.
As the losses and bankruptcies mounted, banks became unwilling to readily lend money.
At the same time, oil prices were rising.
Current situation
A bold government rescue plan is being enacted to take the bad assets off the books of investment banks and financial institutions. In addition to a global rate cut, the goal is to bring stability back to the markets. When this happens, banks will resume lending.
Oil prices are decreasing now; barrels are currently below $100, which is translating to much lower gas prices— less than $3.00/gallon in many parts of the country.
Interest rates are low.
The housing market shows promise in the coming months. While declines in values continue, the decline is slowing and could soon reverse.
What does this mean for you and your money?The housing crisis pulled the rest of the economy into the undertow. You’ve likely seen your portfolio take a nose dive and have experienced fluctuating costs in gas and groceries along with deflating values in your home and credit. The economic slowdown is likely to continue for several more months, but history shows that our economy is resilient.Going forwardAs unsettling as they are, bear markets, even volatile ones like we are experiencing now, are a normal part of the market’s cycles. History proves that those who stay the course during difficult times will be rewarded. While past performance does not guarantee future results, one hundred percent of 10-year stock market periods have made money even though each 10-year period saw some years of highs and lows. The markets will come back. It’s just a matter of time. In the meantime, there are a few things you can do:
Ensure that you are dollar-cost averaging. If you are contributing to a 401(k) plan, you are already doing this.
Ensure that you are diversified.Ensure that your bank accounts are insured by the FDIC.Cut spending.Don’t watch the stock market on a daily basis.
Ralph Huey is a Financial Advisor with Financial Network Investment Corporation, member SIPC. For more information about financial services you may contact Ralph at:
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