Advanced Personal Finance

With the floor dropping out of stock markets around the world, I’m amused by the reactions I see.  From the media, to bloggers, to neighbors and family - they all have an opinion and they all react in sometimes surprising ways.  But if you’re anything approaching a normal person, the recent market decline just isn’t that bad.

I’m okay.  You’re okay.

Here’s something to keep in mind when you’re hyperventilating watching CNBC.  Unless every dime of your net worth is in the stock market, you’re not taking the bath you think you are.

Yes, U.S. equities are down like 17% for the year.  But do you have 100% of your net worth in U.S. equities?  Almost certainly not. 

For example, if you have a ‘reasonable’ asset mix of 70% stocks and 30% bonds, your losses are decidely not 17% for the year.

If you’re like a great many Americans, much of your net worth is in your home.  Are average home prices down since their peak?  Yes they are.  But did you buy at that peak?  Probably not.  So even though houses have come down something like 10% from their peak price nationwide, you haven’t suffered a 10% loss.

More ways it’s not so bad

And think about a couple of other factors.  Inflation is rising.  Whether you believe the federal government’s specific numbers or not, the value of dollar continues to decline over time.  Yes, that means you’re paying more for stuff.  But it also means if you have debt (e.g. student loans, credit cards, car loans) you’re paying your creditors back with cheaper money.

Now consider time horizon.  You fall into one of four categories:

1. You are nowhere near retirement and your investments have years to recoup any losses they’ve recently suffered.
2. You are near retirement but you don’t have the majority of your savings in stocks, meaning what’s happening to the market doesn’t strongly affect your investments.
3. You are near retirement (or otherwise need money you’ve invested) but haven’t properly allocated your assets, in which case you’ve just learned a very expensive lesson and I can’t help you.
4. None of these applies.  You, like half of Americans, don’t invest in the stock market.  Go back to sleep.

So when you read that the stock market has dropped 5 kajillion points, just remember…it’s not so bad.

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This entry was posted on Wednesday, January 23rd, 2008 at 9:48 am and is filed under Investments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.