In the summer of 2007, as the backpage columnist for Money magazine, I did something I beat myself up about for years. The Dow Jones industrial average was charging ahead; after a volatile sprint, it had run up from around 12,500 and kept on going. It was somewhere around 14,000 when I put pen to paper (or more accurately, fingers to keyboard) to announce that I wasn’t going to worry about this — and suggested my readers do likewise.
I wrote something to the effect of: Over the short-term, markets go up and markets go down. Over the long-term, markets have historically gone up. As long as the money you’re investing is money that you’re not going to use for the next five or more years, you should keep investing no matter what the markets are doing. Turn off the television, I suggested. Or follow my lead, and when you think your human nature is going to get the best of you, go out for a run.
And then… well… we all know what happened. The Dow dropped into the mid-6,000s. It wouldn’t hit 14,000 again until 2013. And today, to me, it feels a little like deja vu all over again. But, although many things have changed (including the fact that Money magazine no longer publishes a print edition) you know what? I no longer regret that column. I followed my own advice and continued buying. People who did the same have big fat balances in their 401(k)s. The losers were the people who sold and couldn’t figure out when to get back in.
Which brings me to today. Understandably, you’ve got questions. Here are the answers — and my suggestions for what to do next.
I keep reading we’ve got an “inverted yield curve” and that that’s a signal of a recession coming. What’s a yield curve? What does it mean that it’s inverted? And will we have a recession?
When we talk about yields, we are talking about bonds. (In your investment portfolio, you have three big categories of investments: stocks or shares in publicly traded companies, bonds or debt from those companies or the government, and cash.) The yield is the amount earned in an investment for bonds. Right now, the bonds in question are treasury bonds — debt issued by the U.S. government. These are considered the safest of the safe investments since the U.S. government always pays its bills.
Still with me? OK, now switch gears for a second and think about what happens when you deposit money in a bank. You earn interest. Why? Because you’re letting the bank essentially borrow your money, and the bank is paying you for that. When you put money in your savings account you earn very little interest, and that’s because you could take the money right back out again — you’re making the bank a very short-term loan. But if you put your money in a CD where you agree not to take it out for 3 months, you earn more because you’re agreeing to let the bank use the money for longer. The bank can make plans with that money, and that’s worth something. And the longer you leave the money there, the more you typically earn.
Treasury bonds work the same way. The yield/interest you earn for buying a 2-year bond (essentially lending your money to the government) is usually lower than the yield/interest you earn for buying a 10-year one. Except right now, it isn’t. It flipped, or, as you’ve been hearing, inverted. And that’s a sign that people have less confidence in the government’s ability to pay its bills in 10 years than in 2 years — which represents a general lack of confidence in the economy. This inverted yield curve has predicted recessions in the past, according to Mark Zandi, Chief Economist at Moody’s Analytics. “It’s historically been a very prescient leading indicator of future recession,” he says. “While there may be reasons why this indicator may be a bit off this time and a recession doesn’t hit, it would be wise for us to heed its counsel and become a bit more cautious in spending, saving and investing.”
How can things be bad when they feel so good?
You’ve heard that the economy is doing well and unemployment rates are near historic lows, right? While that may be true, often we don’t know we’re in a recession until it’s already in effect. In this way, the economy isn’t always as good of a communicator as we’d like it to be — we know, we’re frustrated, too.
The published economic reports aren’t always the best reflection of the economy at a given moment in time because so much of the information used in these reports comes from surveys from businesses and households, and that information can’t be translated into data very quickly. Sometimes there are months-long lags between data being collected and data being published, which means big changes in the economy aren’t picked up on as fast as we’d like them to, including news of something as big as a recession.
“It moves so quickly that it’s hard to keep up with,” says Diane Swonk, Chief Economist and Managing Director at Grant Thornton. So, yes, things are feeling good right now, but that doesn’t mean that we’re totally in the clear.
OK, so what do I do now?
First, take a deep breath. Second, there are a few things you can do right now to ensure your financial security.
1) Be cautious in your spending. Eat out less, and put off that vacation you’ve been dying to take, Zandi advises. And triple-check that your employment is secure before even thinking about making a big purchase, like a car or a house.
2) Save more. This might seem like a no-brainer in times of financial turmoil, but according to a recent Fed survey, 40% of Americans have less than $400 cash in their emergency fund right now. If a recession takes hold, you may need more than that, so start to bulk up that stash now.
3) Invest cautiously. Especially if you’re close to or in retirement. Now is not the time to take any risks, Zandi warns. Even if you’re not close to or in retirement, investments you’re making for any shorter term goal (like a down payment or college tuition) should be treated similarly.
4) Refinance. If you have the opportunity to save some money every month by refinancing your mortgage now, you should do it. Don’t wait for the perfect rate. That’s where you get burned.
With Rebecca Cohen
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