-- Sometimes it pays to get back to basics.
In Bailout: What the Rescue of Bear Stearns and The Credit Crisis Mean for Your Investments, USA TODAY investment columnist John Waggoner provides sensible, specific steps to help investors navigate through not just the rescue of Bear Stearns — which now seems like pocket change compared to the $700 billion Wall Street bailout — but the volatile financial markets likely to continue for the months ahead.
Waggoner begins by capably telling the story of what brought Bear Stearns down — not the stock market, but the bond market. And then he marches readers through how the mortgage mess unfolded and imploded, along with a dose of historical perspective.
But that's merely the launching pad for the gist of this personal finance primer. And the fact that the global economic underpinnings continue to quake in the days since Waggoner's book hit the presses makes it even more useful to investors who are running for cover.
Even investors who typically feel pretty confident about their money moves are shaky about what to do with their investments. But "if you do nothing with your money, you will lose it," Waggoner writes.
It's the Red Queen effect, named after the Red Queen in Alice in Wonderland, he explains. In the book, Alice and the Red Queen are running a race, but not moving.
"Well, in our country," says Alice, still panting a little, "you'd generally get to somewhere else —— if you run very fast for a long time, as we've been doing."
"A slow sort of country!" says the Queen. "Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"
Waggoner's message: "If you want your savings to beat inflation, you have to stay invested just to make sure it maintains purchasing power. … So even if you're sure that the country is going to slide into the next Great Depression, you shouldn't be paralyzed by terror. You need to invest."
Where do we go from here? Waggoner defers to Kurt Vonnegut, author of Slaughterhouse Five. In one of his lesser novels, Slapstick, Vonnegut observed: "History is merely a list of surprises. It can only prepare us to be surprised again."
So how to prepare for surprises? Your core plan for investing — using a mixture of stocks, bonds, and money market securities to meet your goals should not be radically different than it has in the past. By and large, a long-term investment mix of stocks and bonds is a good way to beat inflation over time. So "you spread your investment net wide enough that some part of it will respond well to most emergencies."
Throughout Bailout, Waggoner exudes a no-nonsense, levelheaded approach of a wise friend parsing advice on a topic he has spent more than two decades studying in-depth. "We must, of course, assume that somehow the world will muddle through," he writes. "Otherwise, we may as well hunker down in a bunker, eating canned food, and cradling our rifles."
Waggoner strips his advice back to the bare essentials. First, set forth money goals like put a child through college, go to Argentina, and put a price tag on it. The big-ticket item, of course, is retirement. He steers readers, for example, on how to figure out likely expenses in retirement and where the money will come from to pay them — savings, your 401(k) plans, Social Security, pensions.
Next, match your investments with your goals. "We do not know what the future holds," he cautions. "We do know that over long periods of time, the stock market typically recovers from nasty, ugly periods, and still performs better than bonds or bank CDs," he observes.
So if you have "a long-term goal —— say, a retirement that's a comfortable 10 or more years away —— it makes sense to have a large chunk of your portfolio in stocks." And "if you diversify across a wide range of stocks from different industries, you'll increase your margin of safety, too."
Waggoner provides basic definitions of what's a bond, how to buy a Treasury and what is cash. (Cash, in Wall Street terms, is any safe investment that can quickly be converted to spending money.) In return for safety and liquidity, however, you get smaller returns.
If you need money very soon, he outlines how to go about investing in money market mutual funds, T-bills, bank CDs, and so forth.
He hammers home the importance of investing in a 401 (k) plan at work, even when the market is slipping and sliding. And for those without a workplace plan, set up your own automatic investment plan at a mutual fund company, such as Baltimore-based T. Rowe Price. Price allows you to open one for just $50, provided you pledge to keep contributing until you hit $2,500.
Waggoner's overall mantra is old-fashioned, harking back to the heart of all money matters. "The first step to ensure your financial safety is to pay down your debts," he counsels. Create a budget. Pay your bills on time. Find a low-rate credit card. Be thrifty, buy some items in bulk, or purchase a new automatic thermostat, so you can start to accumulate some savings, he suggests.
He provides snapshots on the pros and cons of investing in a range of investments, including exchange-traded funds, which have become a big hit in recent years, bear funds, utility companies, real estate investment trusts, gold, Treasury Inflation-Protected Securities, or TIPS, and even foreign currencies.
Overtime, your mixture of investments will need tweaking. For example, the closer you get to retirement, the more bonds and cash, you add to your portfolio. And you should rebalance your holdings periodically. These days, balances are no doubt completely out of whack. Sell funds that have soared and reinvest into finds that have lagged, he advises.
And writes Waggoner optimistically: "sooner or later —— and we certainly hope sooner — the economy will recover, earnings and personal income will rise, and life will be good again."