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Plan Well, Retire Well

Saving and investing your money

Can't See the (Financial) Forest for the Trees


We often talk about investing for the long-term, and the importance of not making knee-jerk decisions as the stock market falters or surges. But it's hard to not focus on today's headlines or your latest mutual fund report when making financial decisions. Recently I read two articles that helped me regain my financial perspective.

Over Time Extremes Happen

In the article "Rentals Surge, Homes Shrink," Kiplinger's Personal Finance Magazine (November 2010), the variability in mortgage rates over the last 50 years is succinctly shown.

Year

Mortgage Rate

1960

6.2%

1971

7.6%

1981

16.6%

2006

6.4%

2010

4.8%

The rates in the early 80s particularly stick in my mind as I clearly remember friends who had just bought their first home and were very happy to lock in a 30-year loan at 18%! We were young and couldn't imagine rates as low as 5 or 6%. At that time we truly couldn't see the financial forest for the trees that were in the way! Now that I'm "not so young" it's clearer to me that extremes in interest rates do happen – at least in the short-term.

Diversity in Investments Helps

In the News-Gazette (October 24, 2010), Scott Burns wrote that it appears that many investors are staying in the stock market through the economic turbulence of the last few years. He points out that this is very different from what many people did in the late 70s and early 80s when "investors ran away from stocks. They ran into cash and bonds for most of a decade." And unfortunately, some of these people missed the stock market gains during the 80s and 90s.

This time around, early data from the Hewitt 401(k) Index indicates that while people have modified their asset allocation towards fixed-income investments, we're still in the stock market. Reallocating portfolios as needed tends to be a good investment strategy; running from the stock market has historically not proven to be a good strategy. Perhaps this time around people have the education and information needed to be able to think and act on their overall investment strategy overtime even while the daily headlines flash in front of us!



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