Smart401k Blog

In the headlines

A look at some of the market movers over the past week:

• GE (NYSE: GE) disclosed that LG Electronics and Haier are the frontrunners to buy its appliance division
• Bank of America (NYSE: BAC) upped its investment in China Construction Bank
• New home sales posted an unexpected gain
• Costco (Nasdaq: COST) announced strong earnings, while Sears (Nasdaq: SHLD) continued to struggle
• The Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO) soap opera drags on
• Food prices aren’t cooling down yet
• United Airlines (Nasdaq: UAUA) broke off merger talks with US Air (NYSE: LCC)
• Harris Corp. (NYSE: HRS) has put itself up for sale and received some preliminary bids
• Bear Stearns officially bowed out as a stand-alone investment bank
• First quarter GDP was revised upward
• Dell (NYSE: DELL) released earnings that topped expectations

Commentary

Investors must have had an enjoyable Memorial Day holiday, because the pessimism of last week turned back around this week. Though the S&P 500 wasn’t able to make up all of the losses of last week, it did post a full week of gains that made up some of the lost ground.

No single event or theme dominated the week — unless, of course, you consider recession a single theme. Investors, analysts, and the media all still seem to be struggling to read the tea leaves, and we appear to be stuck in an economic gray area. Much of the truly dire predictions seem to have disappeared, though they’re still there if you look hard enough. Most market participants, however, have now seemed to settle on a moderate economic slowdown and are wrestling with the ultimate depth of the dip and the timing of a recovery.

Supporting the moderate slowdown crowd is consistently mixed data coming out of both earnings reports and economic releases. While there is no guarantee that the environment couldn’t take an abrupt turn back downward, the mixed data suggest that the downturn may be moderating if not getting ready to turn the corner. As the first quarter earnings season continues winding down, investors will likely be more focused on economic data such as the ISM manufacturing index and the employment report next week.

Looking ahead

Seth Klarman, renowned value investor and manager of The Baupost Group, closed a speech at MIT late last year by saying: “Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” In the context of his remarks, Seth was getting at the idea that investors should be focused on investing in reliable assets and not getting caught up in the short-term “horse race” of Wall Street.

As I’ve written in the past, investing is as much an exercise in psychology as anything else. The stock market has a tremendous ability to stoke the fires of fear and greed within investors — most often to their great detriment. Many investors that fall into the short term game that Seth warned of in his speech find that they end up not only preoccupied with their investments, but they don’t end up with the returns that they were so arduously chasing.

Fortunately, as we discuss week after week on this blog, there is a simple (though sometimes not easy!) solution to this problem. This solution starts with finding an asset allocation and asset selection that fits your personal goals and features solid, high quality funds. From there, all you have to do is stick to a steady investment schedule and tune out the day to day happenings in the crazy halls of Wall Street.

Of course, as I mentioned above, this strategy is simple but not easy. In other words, while I managed to fit the strategy into 51 words in two sentences, many investors will find it challenging at some point or another to stick to the game plan. Why? Well, the current market downturn provides a good example. Many investors are so concerned with terrible scenarios that may or may not play out that they aren’t investing — or worse, are pulling out funds — at a time when they should be investing more if anything.

Following the stock market horse race can be fun and exhilarating, but when it comes to where you put the money you want to retire on, it’s best to leave the racing to the jockeys.

By now most people have received their stimulus checks.  Like many others, I felt it was my duty to spend the money as quickly as possible to help stimulate the economy.  After all, that was the Government’s intention when announcing the refund, right?  Well after dreaming of all the wonderful things I could use the money for, I started to realize there were better options than just spending it on material goods or a night out on the town.  More urgent day-to-day needs and my longer term retirement goals came to mind.

While I was thinking through my own financial situation, I realized that it might be useful to share how I prioritized potential uses for my stimulus check.  At the top of my list are the day-to-day expenses that we all have such as food and gas.  With gas prices reaching all time highs and about to pass $4.00 per gallon, people have to pay more and more each time they go to the pump.  My co-workers and friends are now paying anywhere from $45 to $100 to fill up their car or truck, and as a result have far less for things like going out to dinner. 

After accounting for day-to-day living expenses, I turned my attention to high interest credit card debt.  If you consider the average household credit card debt is roughly $3,000 with an APR around 19%, it makes sense to try to pay it off as soon as possible.  In fact, a survey by the Harris Poll revealed that 38% of respondents said they will use a lump of their rebate checks to help pay off credit cards.  With such high interest rates, especially those with APR’s above 15-16%, it only makes sense to use this money to pay off credit cards.

Next on my list would be adding to an emergency fund or possibly funding an investment account.  In the Harris Poll mentioned above, over 35% said their rebate checks were going straight into their savings account. I think this is a great idea for those that are building an emergency fund and suggest six months of living expenses as a goal. If you have your day-to-day expenses accounted for, don’t have high interest credit card debt and have an emergency fund built already, you might want to consider investing it.

By using the stimulus check for these expenses, you will free up some money from each paycheck.  I’d suggest investing this portion and increasing your contributions to your 401k.  Unfortunately, I have seen a recent trend where people are doing the opposite, and are actually reducing their 401k contributions.  This trend will have long lasting effects. You might not see it now or in a year, but 10, 15, or 20 years from now, you will see the dramatic effects.  (To see how a change as small as 1% could affect your retirement plan try the “What May My 401k Be Worth?” calculator on the Calculate Your Progress page.)

There are many different options for how to use your stimulus check.  Instead of feeling obligated to spend the money on electronics or entertainment as I first did, I simply ask that you take a look at all of your options and decide what is best for you and your family.

Jeff Studebaker, Investment Advisor

I wanted to let you know that we recently posted two new articles in the Smart401k Insights section of our Tools & Resources page.  The first article ”A Primer on Annuities“ was written in response to numerous inquiries from our clients who had questions about annuities.  We tried to cover everything from “what is an annuity?” to “what should I be aware of before buying an annuity?” and everything in between. 

The second article titled “Smart Savings: Start Now“ is the first in a series of articles about how and where to save during different life stages.  With graduation upon us we decided to start the series by addressing new college grads and those who are just starting to think about saving.  The article provides an introduction to several different savings vehicles and a step-by-step plan on how to get started.  If you know someone who is in this situation you might want to consider combining the article with a gift certificate to Smart401k so they get off on the right foot with their 401(k).  To purchase a gift certificate click here.

We hope that you find the blog interesting and useful.  Most of the articles have been about issues that we hear about from you or see in the news.  We would like to start answering more questions from you and addressing topics that you find interesting.  You can email us directly at info@smart401k.com or post a response/question to one of our posts if you’d like to know more about a specific topic.  As always, our advisors are here to answer any questions you might have.

Scott H

In the headlines

A look at some of the market movers over the past week:

• The dance between Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO) is back on
• Electronic Arts (Nasdaq: ERTS) is still pursuing Take-Two Interactive (Nasdaq: TTWO)
• The National Association of Business Economics thinks that the US economy will return to growth after the second quarter
• Home Depot (NYSE: HD) couldn’t fight off the tough housing market conditions
• The government’s homeowner rescue plan is gaining momentum
• Leading indicators suggest that the economy is not quite in recession
• The producer price index rose less than expected
• The $53 billion buyout of BCE (NYSE: BCE) may be on thin ice
• The market didn’t like the insinuation that the Fed may be done cutting rates
• American Airlines (NYSE: AMR) announced a major capacity cut
• Home prices are continuing to plunge

Commentary

The recent optimism was tempered a bit this week as economic reports made investors reconsider how quickly they wanted to bid stocks back up from their lows. Not all of the news was bad — a measure of economic leading indicators rose for a second consecutive month, suggesting that the economy is not in dire straits. However, the producer price index — a measure of inflation — showed prices for goods other than food and energy rising more than expected.

More impactful was the release of the Federal Reserve’s minutes from its most recent meeting. In short, the notes said that the risks of inflation are now balancing out the risks to economic growth, which suggests that more interest rate cuts are unlikely. The market clearly took this as bad news, but it should be noted that this could also be read as the Fed’s belief that the economy is stabilizing and no longer requires resuscitation from rate cuts.

Looking ahead

What we can be assured of looking ahead is that the market will continue to bounce around. The overwhelming deluge of bad news seems to be over, and we now have more of a balance of good with the bad. Most analysts and economists continue to believe that the economy will see marked recovery in the second half of the year. Of course, however sure they may be of that, consensus projections often turn out to miss the target. For that reason, we continue to suggest that long term investors keep on their investing schedule and not try to time the market.

As captivating as the markets can be, sometimes the best investing medicine is to unplug from them. So, with that, go out and have a wonderful Memorial Day weekend!

In the headlines

A look at some of the market movers over the past week

• HSBC (NYSE: HBC) started out the week announcing that bad debt expense for the first quarter wasn’t as bad as some had expected
• Research in Motion (Nasdaq: RIMM) fired back against Apple’s (Nasdaq: AAPL) iPhone
• Investors were encouraged by a lackluster, but not terrible, report from MBIA (NYSE: MBI)
• Hewlett-Packard (NYSE: HPQ) announced a $12 billion acquisition of EDS (NYSE: EDS)
• Wal-Mart’s (NYSE: WMT) earnings beat forecasts but its outlook didn’t encourage
• US retail sales painted a mixed picture
• US foreclosures are only getting worse
• ArcelorMittal (NYSE: MT) rode global demand to a favorable first quarter
• CBS (NYSE: CBS) announced that it is acquiring CNET (Nasdaq: CNET) for $1.8 billion
• Inflation in April was less than had been previously forecast
• Billionaire Carl Icahn has jumped into the Yahoo! (Nasdaq: YHOO) fray
• Macy’s (NYSE: M) is planning to open FAO Schwarz toy boutiques in 685 of its stores

Commentary

It’s not a stretch to say that it was a really good week for the markets. Not only were they up, up, and up, but they were notably docile. As I’ve said previously, in a recovery I’m looking for not only a market that’s moving up, but a reduction in the type of extreme volatility that suggests that nobody has any clue what’s going on. We had both this week, and it’s become a bit of a trend. It’s been nearly a month now since the last time the S&P 500 has moved more than 2% in a single day, and the S&P is up around 4% over that period.

Back in mid-March, we hit a low on the S&P that put the index down just a hair over 20% — just barely enough for investors to really consider it a market downturn — from the intraday peak in mid-October of last year. Since then we’ve charged back around 13% and remain a bit under 10% from that October peak.

The recovery may seem a bit hasty, after all, we’re still seeing anemic economic growth and weak consumer spending and it’s expected to get worse. But it’s important to keep in mind that the economy and the stock market are not one in the same. Stock prices began declining when economic growth was still robust, and, as it has happened in the past, they are expected to recover ahead of the economy.

Looking ahead

We’ve still got inflation, recession, oil prices, consumer spending, the housing market, and financial company write-downs — to name a few — that all have a lot of power to spook the market. And of course we don’t want to discount the unknown, because it’s actually the risks aren’t even on the radar now that will really put some fear into investors.

Of course that’s not to say that investors will get spooked. Unless something really unexpected shows up or the credit market starts deteriorating at an accelerated pace, the market will likely drift flat-to-slightly-up until we start getting second quarter earnings reports. Many companies have said that they expect the second quarter will continue to be slow but that growth will pick back up in the back half of the year. Come second quarter earnings season we will start hearing from companies whether or not that will be the case, and afterwards we’ll certainly see a reaction from the market one way or the other.

Not surprisingly, we continue to recommend that if you’re investing for the long term, your best bet is to tune out the day-to-day concerns of the stock market and financial press. Keeping a diversified portfolio of high quality funds and investing on a set schedule is a great way to earn attractive returns with little effort.