Wow, it’s been quite a ride this past week. The stock market roller coaster is not for the faint of heart. The debt ceiling deal was signed by President Obama and all hell broke loose after that. The investors stepped back, looked at the economy and saw that it was not doing well. In addition, S&P downgraded the US credit rating from AAA to AA+.
I thought the interest rate would go up a bit with the downgrade, but the opposite happened. Usually, if a security is more risky, the interest rate rises to compensate for the risk. However, the US bond interest rate lowered even after the downgrade. This happened because investors still trust US bonds and they have no confidence in the stock market. Many investors sold their stocks and moved their money to the safer US bond, driving the interest rate lower. The credit rating might have been downgraded, but US securities still the best game in town. Unfortunately, I locked the rate for our 4 plex financing before the interest rate dropped. This week, the rate is down 0.125% from 2 weeks ago. Doh! This will teach me to not assume anything.
Back to the stock market. The uncertainty of the debt ceiling debate, economy slowdown, and S&P downgrade all drove investors to act.
As an investor, here are some of our options.
- BUY more stocks. If you have extra money in the emergency fund, this might be a chance to get some quality stocks for a discount.
- HOLD and stay the course. Go have a slushy, enjoy the summer, and ignore the news. Let the auto contribution do it’s thing and dollar cost average.
- SELL first, ask questions later. Many investors sold their stocks on August 4th. This prevented further losses, but the herd mentality also drove the stock market lower.
- SHORT the market. I think this is very risky, but many people must have been making a lot of money over the last few days.
I confess that I’m the investor #2 in this list. We have been through the dot com bubble and the 2008 down turn so I’m somewhat used to the roller coaster ride. I don’t have a conniption anymore when the DOW drops 600 points.
This year, we have a few extra dollars in our emergency fund so I think I will invest in a few quality blue chip stocks during this downturn. I’ll also take this chance to contribute to the 529 by investing $2,000 now and then $2,000 near the end of the year. This will spread out the risk a little bit. I guess I’m leaning more toward #1 this year. I am terrible at market timing so I’ll leave #4 to the professionals. There is no way I can get rich shorting stocks.
Our investment timeline is still 20+ years and I know there will be downturns here and there. If I had needed to withdraw money next year, I would have been panicking a little bit. Then again, I would have most of my money in a safer investment like the US bond.
What about you? What have you been doing over the last week? Did you give yourself an ulcer from looking at the stock?
roller coaster photo credit – flickr _PaulS_
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.