Aug 30, 2010

Making Sense and Losing Cents of the Economy

Like everyone else who has a dime or more invested in equities, I’m concerned about the future of the stock market. Whenever the market looks so bleak, everyone is concerned. And that’s usually the best time to invest. Yet with my yearly investments becoming more sizable, this feels a lot like Las Vegas. Even with diversification, it doesn’t help when all (or most) stocks are on red.

After receiving my paycheck for the past months and reimbursed expenses, I realized that I’m sitting on $16k liquid in my checking account. Part of me hates writing about this because I know I’m so lucky to have the luxury to ask the question “where should I invest?” But this may also be a temporary income boost and I want to invest wisely.

Yesterday, I pulled out my social security statement and studied my yearly income since 2002. Other than last year, I made somewhere between $0 and $25,000 each year. Last year, I broke $60k for a full year’s worth of work. This year as of Sept 1, even with 2 months of unemployment (unpaid), I have earned around $70k this year. And with the way some contracts are shaping up, I expect to make an additional $10k to $30k by the end of the year. So now I face the unlikely problem in a time of economic crisis – what do I do with all this money?

The easy answer is: spend it. Not on wasteful purchases, but things that I need or will need soon. I could buy a new car, or a “new” used car. Or I could invest in property somewhere (though that requires stable long-term income, which I am not confident I’ll have, especially with my plans to go back to school in the next two years.) So where do I put the excess cash?

I’ve already maxed out my IRA and will, within this month, max out my 401k (no match, bummer.) I will likely put another $2000 in my HSA which is invested in very low-risk funds. My IRA is in Sharebuilder and I bought 5 funds – the gold ETF, the silver ETF, two high-dividend ETFs and a REIT ETF. My 401k is invested in a mix of equities and bonds, and I’m not clear what is in it exactly. With a large chunk of my savings this year going into my 401k, I’m concerned that in the next ten years we’ll have deflation, high taxes, and my 401k will turn to mush.

But I’m willing to take that risk with $16.5k because it could be a very good time to invest as well. I’m just not sure I can stomach taking that risk with more money. Not without understanding the real economic situation in this country and the world. History doesn’t always repeat itself, or even if it does it may take a longer time to turn around. I’m young now, I can handle that, but if the next 5-10 years will be lost decade #2, why should I play?

The whole media fueling the fire is disturbing as well. I can’t tell how much of the stocks slipping these days is all the fear stories about how bad the economy is doing. It’s a domino effect that goes in a circle downward. What if all the news resources lied and said the economy was turning around and there’s a ray of sunshine close ahead? If people would invest and spend money than… well, that seems to be the only way to dig ourselves out of this mess right now. I don’t know if I agree with that, but what else can we do? We need people spending again so companies will start hiring again. That’s how capitalism works, right?

But it will take a long time to trickle down to lower and middle classes. The media couldn’t lie for that long. News would get out that the future is not so sunny. And everything would crash again.

Or you can just – apparently – print money until the cows come home and thus make every dollar worth less and less and less. That can’t be a good thing.

Right now lots of big names in economics are saying that we may have a “double dip recession” or – worse? – a depression… because we never actually recovered from the first recession. I wish I understood economics jargon more so I could make sense of this, this, this and this ... and the thousands of other economic gloom and doom stories I'm reading.

Any feedback from those of you out there who are more economically savvy?


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