I see it every time I work with new clients. They are not happy with the level of financial education that they have. They find it hard to make decisions about money – especially investing – because they do not understand all of this financial mumbo jumbo.
I am challenging you to educate yourself and read this. The more you understand this stuff, the more clarity you could have when making investment decisions with your financial advisor, by yourself, or with your significant other.
As I write this, the Dow Jones Industrial Average is down 540 points in 2 days. Holy cashish! What happened?
A few days ago Ben Bernanke, chairman of the Federal Reserve, said he plans to stop buying bonds by the end of the year. That freaked everyone out.
Why? By buying bonds, bond prices go up and interest rates go down. So if Ben stops buying bonds, mortgage rates would most likely go up, home prices could go down, and the economy could slow. If interest rates go up, that means the interest that you pay on any type of adjustable rate would go up – adjustable rates on mortgages, credit cards, and bank loans. That's not good for the consumer.
And what does this have to do with investing? Stock prices usually go down before you hear the news about how bad the economy is. So stocks are discounting (or factoring in) a potential weaker economy down the road. Bernanke is doing this because he thinks that the US economy is back on solid footing. If it artificial keeps rates low, it could create major inflation.
Stocks are down because people are selling, or people do not want to buy at these prices.
Lesson # 1: Why has the Fed been buying bonds? What's that all about?
Well, the Federal Reserve has been buying bonds to lower interest rates, which in turn has made mortgage rates go down. Everyone and their mother have been able to refinance. When you refinance, your monthly payment goes down. You now have more money in your pocket. You could use the cash to spend on other things like: paying down other debt, saving for retirement, taking a vacation, going out to dinner, etc. You simply feel wealthier.
Lesson # 2: Investments, like stocks and bonds, can go up and down all of the time.
But is anyone really making money investing these days? The answer is YES. Major yes (this is as of 6/21/2013). Stocks and bonds are both up nicely over the past 5 years.
Here's the deal. We are all long term investors until we become short term investors. We become short term investors when we lose major money. We become short term when we can not take the heat so we get out of the kitchen and sell. That happened in 2008. But the investors who started with an investment plan that met their level of risk stayed in the game and rode out 2008, and went on to make some money for the next 5 years.
I can not guarantee that investing with an appropriate level of risk you will make money. I'm saying you will give yourself a chance to have time on your side for your investing. Generally, the longer you invest, the higher the odds that you could make money.
So there you have it. I hope you understand why stocks have gone down due to potentially higher interest rates (mortgage rates.) Think about what type of risk level you want to take with your money and investing. Think about how long you could stay the course even when things stink. I want you to stay in the game. The game could last a long time. The game could be good when you have time on your side.