What to do in this market.

**jIM_Ohio** · 10-22-2008, 02:32 PM

I had about 200k invested before this whole thing hit and am down about 40% (80k) everywhere.

My thought on your situation is that you are going with a broad "pay down debt" plan while still investing some.

Are you investing 15% of your gross pay for retirement? If not, I would suggest addressing this now.
Between the $200 extra on mortgage, and the extra towards the cars (guessing another $200?), plus $625 going into a money market, I think you have the ability to do some good for yourself.

Choice 1 would be put all the money used to pay down debt into the market. You would be buying at probably the low point of your investing life (unless you were investing in 2000-2002).

Choice 2 would be funnel all extra money towards a car debt. Why deposit $625 into a money market earning 3% when you can pay off a car debt probably costing you 4-6%?

Choice 3 would be keep doing the car pay down plan, but direct the $200 extra on mortgage into market (in a taxable account), and also the $625 going to money market into the market (equities). Once market has a positive annual return, leave the money invested, then resume paying the mortgage with $825 extra. Logic here is you want highest return on your money. When stocks are low BUY, when they are going up HOLD and when you think market is close to top (20-40% gains) I would sell back to cost basis.

Sell back to cost basis is that if you invest $825 for 12 months ($9900), then the investment reaches a value of 40% higher (decide % when you make the investment), 40%=$14,000, sell the $4100 profit back to cost basis of $9900. You have kept your profits and could use this to pay down debt or keep as cash for next dip.

The above may not have directly answered your question... that is because the bigger picture is you have lots of little investments in various things, but no solid plan going in 1 direction.

To find this direction, you need to decide the following:

1) Are you setting aside 20% of gross pay for financial independance?
15% to retirement
5% to personal goals (like extra payments on debt, company stock or other)
This assumes you already have 3-6 months cash set aside for an emergency fund.

2) Do you know how much risk you are willing to take investing? Has this risk been translated into an asset allocation of % stocks and % bonds?

3) Have you chosen mutual funds which fit into the asset allocation defined in #2?

My guess is you did #1 then skipped to #3. If you have #2, that gives you the answer you need. I would be buying equiites in line with asset allocation you defined for yourself. Everything is down now, so what you contribute to until you figure out #2 is not that important.

**khilleme** · 10-22-2008, 03:01 PM

We started investing in 2001 when my husband and I both got our jobs. Since then we have been putting 10% into 401Ks, and funding Roth IRAs. Then we opened the brokerage account which has a money market and 2 mutuals funds. The reason we are putting $625 into the money market is that it feeds the two mutuals funds. It is only a holding area, and I understand that it only makes 3%. The car loans are both under 5% and the student loans are consolidated at 3% so we felt that we could make more with the money in the stock market then to be paying down the debt, however in the last year we have been putting whatever we can extra to my car to get it paid off and then apply my payment to my husbands car. The 15K in the FNBO is emergency funds. And we have a general savings account with ING that we contribute $150 a month for vacations and fun things. The IBM stock is for a real estate purchase at some point, possibly a cabin when we pay off all our other debt. I also buy bonds through work and we have several thousand dollars there but I am holding that until we have kids to open a 529 plan, since you can't open one before you have kids. The reason we are putting $200-250 extra on the mortgage is that I really hate knowing that if we had to sell our house we might take a loss - that is a sleep at night kind of thing rather than anything else. So the real direction question is, should I focus hard on debt and take some of the money we are putting into investments or forget the debt for know and buy some more stocks/mutuals funds. I have a pretty high risk tolerance although this market can shake even the most confident investor. I understand that now is the time to buy but I am just not sure what is the right type investment to go for and I want one that I can fund monthly rather than a lump sum like Scottrade, etc.

**jIM_Ohio** · 10-22-2008, 03:54 PM

Originally posted by khilleme View Post

We started investing in 2001 when my husband and I both got our jobs. Since then we have been putting 10% into 401Ks, and funding Roth IRAs. Then we opened the brokerage account which has a money market and 2 mutuals funds. The reason we are putting $625 into the money market is that it feeds the two mutuals funds. It is only a holding area, and I understand that it only makes 3%. The car loans are both under 5% and the student loans are consolidated at 3% so we felt that we could make more with the money in the stock market then to be paying down the debt, however in the last year we have been putting whatever we can extra to my car to get it paid off and then apply my payment to my husbands car. The 15K in the FNBO is emergency funds. And we have a general savings account with ING that we contribute $150 a month for vacations and fun things. The IBM stock is for a real estate purchase at some point, possibly a cabin when we pay off all our other debt. I also buy bonds through work and we have several thousand dollars there but I am holding that until we have kids to open a 529 plan, since you can't open one before you have kids. The reason we are putting $200-250 extra on the mortgage is that I really hate knowing that if we had to sell our house we might take a loss - that is a sleep at night kind of thing rather than anything else.

So the real direction question is, should I focus hard on debt and take some of the money we are putting into investments or forget the debt for know and buy some more stocks/mutuals funds. I have a pretty high risk tolerance although this market can shake even the most confident investor. I understand that now is the time to buy but I am just not sure what is the right type investment to go for and I want one that I can fund monthly rather than a lump sum like Scottrade, etc.

I have said this before- the market does not change your risk tolerance. You have a tolerance for risk and you need to define an asset allocation for that tolerance.

I am quite aggressive- 97% equity and 3% bonds; slowly moving to 80% equity and 20% bonds for all long term money.

I make all decisions for investing based on that allocation. Stocks go down, my allocation is out of whack, so I need to buy more stocks. Stocks go up, I need more bonds, so I buy more bonds and occasionally sell the gains in the stocks to buy even more bonds (only sell once per year is my rule for myself).

My comment was you are going in so many debt paydown directions it might not make the most financial sense. But you added the "sleep at night" factor.

Here is the math I would look at:

Pay down car budget (assume $200/month)
Pay down house budget ($200/month)

Car payment is $800/month (guessing).
Student loan payment is $300 (guessing again)

Let's assume the paydown plan you have in place is going to make cars go to zero and student loans go to zero in 10 years (I have no idea on the numbers, but if you are asking the question pay down or invest, you should look to when the money is available). 10 years of $2400 extra is $24000.

This $24000 freed up $800+$300+$200 in the budget ($1300/month).

If you paid $200/month to house over same 10 year period, the house will have $24000 more equity.

That is one example for use of $400/month or $48000 over 10 years to free up an addition $1300 in take home pay.

If you concentrate the $400 towards the cars and student loans, you will probably pay off the loans in about 7 years (I am guessing you will get it done 30% faster). This means it cost you $34000 to free up same $1300. This allows you to then pay down mortgage $1300*3 years=$47,000.

Implying you can
a) free up the payments of cars and student loans sooner by paying extra on them
b) still pay down mortgage same amount, just starting 7 years later and making larger payments.

Then compare this to
1) investing $200/month over same 10 year period
2) investing $400/month over same 10 year period

I always look at problems like this with a timeline
reasons:
a) with normal payments the debts will be paid off, so that "end date" is worst case and end of the timeline.
b) risks change with time. As you have more invested in equities, as you get older you will want to modify the risks you are taking- get mortgage paid off, get financial house in better order and probably shift some investments to bonds or other stable assets.
c) the points where "more money becomes available" are decision points. Do you prefer to make one decision -the broad approach you are doing now- then wait 10-15 years for the plan to finish, or concentrate and achieve shorter term goals freeing up cash flow.

Example:

Broad approach

car 1 (pay W extra) car 2 (wait utnil W is available) student loans (pay X extra) cabin (invest Y towards this goal) house (pay Z extra) retirement savings (save A%=$A)

(you are doing all these at once)
W X Y Z A
then car 1 is paid off----->W X Y Z A until car 2 is paid off
Then W to student loans W X Y Z A

Then you bump the cabin goal up a notch
--->W+X+Y to cabin with Z A still there

Then you ramp up mortgage payoff and the retirement savings
----------> Z+W A+X

with time increasing as you go down
(this means car 1 is paid off, then car 2 is paid off while also paying extra on mortgage and investing some for retirement)

If you put times on each of the payment shifts, you have to wait a long time before you can kick retirement up a notch, or wait to get mortgage paid off. You are locking yourself into a plan which will take a long time to see if it worked.

If you concentrate it is somewhat the same (assuming the retirement contribution starts at 15% at begining of timeline)

car 1 car 2 student loans cabin house retirement savings
X Y A

Only assign money to 3 goals- fund retirement first, then send a minimal amount to cabin fund and concentrate on debt 1 (car).

Continue until car is paid, then shift to car 2 then shift to student loans.

Once this is done you could move money towards cabin goal and concentrate on that.

(you could make a decision here because money is available and if life changed, you have the money to meet the change; when compared to above, this decision comes sooner)

From a planning perspective, you need to choose the right "end time". In the first part of my post, I suggested the time was when the 3 debts were paid off. In the second part with this crude graph, retirement is the end date. You mentioned getting a second house- that might be the end date you measure. How soon can you get the vacation cabin?

The whole point is you have lots of little actions going on in your financial life now
1) paying down cars
2) paying down mortgage
3) investing for cabin
4) investing for retirement
5) other? not sure

These actions are not all going towards same goal (as it appears to me). I think this is because you don't have a clear goal stated or otherwise.

You always need to fund retirement. 10% is good, I think you might find that your "retirement time" on a graph like above is really late in life (age 72??). But that might be OK if you get the cabin sooner- only you can make that decision.

If you fund 1-2-3 at same time, you might find that what you want (#3) is pushed really late in life. If you concentrate because it is a clear goal, then you can start saving seriously for it because you concentrated on freeing up the cash flow.

Your 15k EF- maybe you should figure out how much you are upside down and the EF needs to be this amount (that way if you sell, worst case is you lose the EF). As you make normal mortgage payments, you could then liquidate the EF some to fund the other goals.

One other issue with this- because there is action towards paying off the car early to get the cabin, you should also take steps so that when one of the cars cannot be used anymore (breaks down) you have cash on hand to pay for it. If you only focus on getting the cabin, there is an emotional risk associated with diverting money away from the goal towards that car needed in 7 years when the current one breaks down.

You are doing an excellent job seeing the problems and issues. You are also setting aside a good chunk of your income (I am guessing based on numbers you save close to 15% for retirement between 401ks and $300/month to Roth). I would probably fully fund roth for both spouses before sending $625 to a taxable account.

**responduser** · 10-24-2008, 12:31 AM

The whole point is you have lots of little actions going on in your financial life now
1) paying down cars
2) paying down mortgage
3) investing for cabin
4) investing for retirement
5) other? not sure

There are few more like your children's education which costs a lot now-a-days.

**$save** · 10-26-2008, 02:57 PM

Great information thanks

**maat55** · 10-26-2008, 04:53 PM

I would invest in your 401k's to the match, then apply all extra funds toward your debts, other than the house. Then go back to investing.

What to do in this market.