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Old 02-25-2009, 09:54 PM   #41
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Kombat, you also described my own situation. We are 34, started working in 2000, saved a good chunk of our income from day one and things looked pretty darn good in 2007 (we averaged 8%+ annual return since 2000 despite the tech bubble bursting on us). We seemed to be right on track with our retirement plans (FI at age 45-50). Then it all came tumbling down. Our average annual return is now right around zero.

It's disappointing. But we are young (that's the silver lining). We have time to adjust our retirement plans and savings rate to compensate for any shortfall and we have time to recoup those losses. But this was an important market lesson for me and it will have a lasting impact on the way I save and invest my money in the future. I will have a much better appreciation for equity risk, that's for sure.

The lesson was much more brutal for people in their 60's and 70's. I have been astonished at the number of retired people I meet who have lost 40-60% of their nest egg. Most had over 80% of their stash in stocks, some even had most of their money in a single stock. Many didn't even know they had that much money riding in the stock market because they trusted their FA to come up with an age-appropriate asset allocation. Even people who were diversified have lost considerable amounts of money. My MIL, 65, is freaking out right now. Her small nest egg has taken a beating and she needs the money to help pay the bills.
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Old 02-26-2009, 08:50 AM   #42
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The lesson was much more brutal for people in their 60's and 70's. I have been astonished at the number of retired people I meet who have lost 40-60% of their nest egg. Most had over 80% of their stash in stocks, some even had most of their money in a single stock. Many didn't even know they had that much money riding in the stock market because they trusted their FA to come up with an age-appropriate asset allocation. Even people who were diversified have lost considerable amounts of money. My MIL, 65, is freaking out right now. Her small nest egg has taken a beating and she needs the money to help pay the bills.
If the young people take any lesson away from this economic downturn, it should be to "not get complacent". I am 62 and I learned this lesson in 1978 with 15-20% inflation, high unemployment, and zero economic growth was called stagflation.

In good times people are always saying, "We finally have full control of the economy and never will experience a downturn again." That's a sure sign that people are becoming too complacent. In most cases, you can see the writing on the wall of a coming recession. The BIG clue this time was the doubling of house prices in a 5 year period. Nothing doubles in value in 5 years - especially big ticket items. Something must be wrong. Also, our national debt was steadily accelerating and the import/export balance of trade was growing at a rapid rate as well.

All of these very disturbing economic trends were well reported in the news, yet the stock market continued to climb. If the one rule of thumb for successful investing is "invest for the long run", then a second rule of thumb is to change your portfolio (and take your profit) when thing look "too good to be true". This may should like conflicting advise, but it is not. The "long run" should be a length of time about 5-7 years. If your investment strategy has produced a nice profit after this length of time, then it is time to restructure. Put more money in safer places and review your portfolio to make sure you are not in a dying or threatened market.

Second, look for black clouds on the horizon. One example is health care stocks. They have been climbing steadily for a long time, highly recommended as being "recession proof", and now Obama has a mandate to lower health care costs. You don't have to be a stock wizard to see that investing in health care is risky. If I am totally wrong then I will have missed out on an opportunity. IMO it is better to error on the side of caution.

You can use the same common sense logic to see where the sun is likely to continue to shine. Recognizing that a falling stock market leaves few survivors, every stock is at risk simply because of investor sentiment. This tells me that some very promising businesses must be extremely undervalued. Looking at the world around us, it seems obvious that technology still has a strong future. Handphones are constantly evolving - but I see many areas of life that technology has not yet touched. All levels of education could become more interactive through some yet undeveloped device that ever student needs. Interactive shopping and aids for running a household still is still stuck on the internet. I can see the need for devices to monitor food supply and other household supplies becoming more interactive and user friendly. The same devices could aid business office supplies.

Since most technology stocks are traded on the Nasdaq, it seem logical that this still has a lot of potential for growth. A broad based technology fund, such as Vanguard or technology exchange-traded fund (or ETF) clearly has a bright future.

My point in all this discussion is not to give stock advice. Rather, be aware of what major trends are changing in the world around you. Of course you will want to listen to the convention wisdom for constructing your investment portfolio and strategy. However, when the time comes for you to make the hard decision on selecting an area of investment, look at the macro world around you for some obvious clues on what the future holds. And don't disregard the obvious dark clouds and rays of sunshine.
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Old 02-26-2009, 09:54 AM   #43
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In many ways, I feel cheated. I've followed all the usual sage advice about "paying ourselves first," saving and investing 20% of our wages, choosing mutual funds instead of trying to pick stocks, buying and holding, dollar-cost-averaging it, the whole bit ... We haven't achieved a 10% rate of return - we've achieved 0%. When you factor in inflation, we've been losing 2-3% per year. What's going on? We played by the rules, we did all the smart things we were supposed to.
Let me guess: you also have been renting or living in less-than-ideal housing because you didn't want to spend more than you could reasonably afford, while your friends and neighbors who make and save less than you do bought big houses that they couldn't afford.

Am I right? If so, we're in the same boat. Nice to see that not only are my investments tanking, but having been responsible for the past 10 years I'm now expected to help bail out those irresponsible neighbors simply because someone utters the magic words "lose their home" and "American dream". Give me an effing break, and get your @ss into a rented apartment!

The inescapable fact is that had I been irresponsible with my money, spent more than I could responsibly afford on a house (and perhaps cashed in imaginary equity to fill that house with expensive toys) and took on zero investment risk in whatever I did save (i.e. just throw it into FDIC insured CDs) I would be enjoying a much higher standard of living than I am today.

I'm really bitter about it. It seriously has me questioning whether the best strategy for the future isn't simply to just follow the herd no matter how foolish they are, because there is apparently safety in numbers; you will belong to a group with the power to simply take from others.
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Old 02-26-2009, 09:59 AM   #44
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For a bunch of 25-35 Year Olds, you sure are soundng like a bunch of old pharts!

Join the club. But take some time out from your grousing to have some fun. You're young!


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Old 02-26-2009, 10:14 AM   #45
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Is it really as bad as you guys are making it out to be? Obviously it is unfair that worthless pieces of crap that ran up huge debts and bought houses they could never afford are getting big ole hunks o govmint cheese now. But don't you all still have decent sized six figure portfolios (1/2 the size of a year ago admittedly)? And don't you have a low cost lifestyle that will continue to allow you to save a significant portion of your income? Your debt-ridden peers will probably come out of this with very little net worth and no ability to save any real portion of their income.

Those suckers that are getting bailed out will never learn. Just feel comfort in the schadenfreude that they will be working many decades beyond what you will have to.

One thing I have learned from this is to go ahead and loosen the purse strings a bit and enjoy life now more. It may add a few months or a year to that FIRE date, but so what?
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Old 02-26-2009, 09:21 PM   #46
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Trust me. As soon as you're past 35, all of your worries go away, as well your hair, your waist line, and your libido, so look forward to a great a future!
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Old 02-26-2009, 10:17 PM   #47
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Is it really as bad as you guys are making it out to be? Obviously it is unfair that worthless pieces of crap that ran up huge debts and bought houses they could never afford are getting big ole hunks o govmint cheese now. But don't you all still have decent sized six figure portfolios (1/2 the size of a year ago admittedly)? And don't you have a low cost lifestyle that will continue to allow you to save a significant portion of your income? Your debt-ridden peers will probably come out of this with very little net worth and no ability to save any real portion of their income.

Those suckers that are getting bailed out will never learn. Just feel comfort in the schadenfreude that they will be working many decades beyond what you will have to.

One thing I have learned from this is to go ahead and loosen the purse strings a bit and enjoy life now more. It may add a few months or a year to that FIRE date, but so what?
I have this sick inclination to double down and open a Roth for the wife. And, this is coming from a non-gambler. So, who knows what it'll bring. Still happy for my stable job, health, and ice fishin' trips.

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Trust me. As soon as you're past 35, all of your worries go away, as well your hair, your waist line, and your libido, so look forward to a great a future!
You mean things get worse! Next thing you're gonna tell me is that a 13 yr. old is worse than a 3 yr. old!

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Old 03-01-2009, 12:54 PM   #48
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I'm 38, and my wife is 30. We're ok so far. Skipped the stock market entirely and paid off the house instead. We just got our release of lien document a week ago.

In 2007, when we were going full throttle with the extra house payments, several of my colleagues at work told me I was crazy - that I could earn much more in a conventional portfolio. Well, hindsight's 20/20, but I'm sure glad we took the course we did. The equivalent of a 6.5% return, when others were losing 30-50%. And that house payment is gone forever, regardless of what the market does.

Regardless, being in this age group, you have to keep in mind that it could be a lot worse. A lot of the loss is not actually realized unless you freak out and sell at the bottom. For older people - ouch. My father-in-law got hurt a lot. He lost a lot in 2002 when he was just about to retire, and now this. Luckily his wife is younger and still working, but it's tight for them right now.
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Old 03-01-2009, 01:57 PM   #49
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During 2007 and 2008, my investments were split between maxing a Roth, and putting the other half in CD's at 6%.

I fully intend to max my Roths this year, and next year, however I have to do it. The stock market is looking like a really good investment now, especially with the tax-advantages a Roth offers. I have only been investing a couple years though, so that takes a lot of the sting out of the recent plunge.

I rent as well, it is not that bad. For one thing, I still have the potential first-home credit to use (which is now a real tax credit and not a 0% loan), and, I am not underwater with debt repayments on a mortgage. While the government is "bailing out" some people, it is only those who are actually trying to pay off their under-water mortgages, the mortgages are not getting forgiven. Even if some it was forgiven, since it is a bank loan, the forgiven loan is counted as taxable income, and they still have to pay taxable gains tax on it, whether they know that or not.

I don't think any of the people who made stupid decisions are getting off free.
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Old 03-02-2009, 06:55 AM   #50
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As an oldster, I can tell you that Roth is a really good deal. I have heard of a lot of people who get sick and need to take out IRA money premature. There is no early withdrawal penalty, but it just seems there is never a good time to pay taxes on an IRA distribution. If you've got to pay taxes, it's best to pay them when you have a earned income, IMO.
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Old 03-02-2009, 08:03 AM   #51
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If I were really young I think my greatest fear wouldn't be the market itself in terms of my own retirement, but the fact that the longer the market stays depressed, the more people who would otherwise retire feel forced to keep working, which would over time significantly reduce new job openings.

If I were 25-30 years old, that aspect of the market would worry me more than a prolonged slump in my own account balances.
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Old 03-02-2009, 08:36 AM   #52
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As an oldster, I can tell you that Roth is a really good deal. I have heard of a lot of people who get sick and need to take out IRA money premature. There is no early withdrawal penalty, but it just seems there is never a good time to pay taxes on an IRA distribution. If you've got to pay taxes, it's best to pay them when you have a earned income, IMO.
Good point, one that I had not really thought of.

I am trying to convert as much as I can within my tax bracket, and I continue to max Roth contributions while DW is still doing part-year work. And while I think a Roth is a good idea, I'm not really sure (we can't be sure to changes in tax law and our situation). So I look at it more as a tax diversification technique. I already have ~50% of my NW in a Trad, so I'm trying to get a good balance in Roth.

So yes, if I was in a position where I had to pull a big amount in one year for some unexpected expense, that would kill my taxes for that year if I pulled it from a Trad IRA, but a non-event if pulled from a Roth. It could put me in that targeted 2% of rich people!

Thanks, that's making me feel better about my Roth conversions.

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Old 03-02-2009, 10:38 AM   #53
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Even if some it was forgiven, since it is a bank loan, the forgiven loan is counted as taxable income, and they still have to pay taxable gains tax on it, whether they know that or not.
I believe they passed a new tax law a year or two ago that says you don't have to recognize the income from forgiveness of mortgage debt. Not sure if it is temporary or permanent though...
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Old 03-02-2009, 10:50 AM   #54
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Permanent. I believe you have to be adjudged "stupid".
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Old 03-02-2009, 11:11 AM   #55
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Permanent. I believe you have to be adjudged "stupid".
Great. So now if you lose a half million on a house, forgiveness of debt is tax free income. And if you make a half million on a house it is tax free income (assuming you are married). Those are better odds than what Vegas offers!
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Old 03-02-2009, 11:32 AM   #56
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When I said permanent I should have said it "sunsets" in 2012. Anyway here is a IRS document that spells out the thing ($1MM limit is there someplace): Mortgage Workouts, Now Tax-Free for Many Homeowners; Claim Relief on Newly-Revised IRS Form
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Old 03-02-2009, 12:32 PM   #57
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When I said permanent I should have said it "sunsets" in 2012.
Permanent is the new temporary.
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Old 03-02-2009, 06:44 PM   #58
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I'm 38, and my wife is 30. We're ok so far. Skipped the stock market entirely and paid off the house instead. We just got our release of lien document a week ago.

In 2007, when we were going full throttle with the extra house payments, several of my colleagues at work told me I was crazy - that I could earn much more in a conventional portfolio. Well, hindsight's 20/20, but I'm sure glad we took the course we did. The equivalent of a 6.5% return, when others were losing 30-50%. And that house payment is gone forever, regardless of what the market does.

Regardless, being in this age group, you have to keep in mind that it could be a lot worse. A lot of the loss is not actually realized unless you freak out and sell at the bottom. For older people - ouch. My father-in-law got hurt a lot. He lost a lot in 2002 when he was just about to retire, and now this. Luckily his wife is younger and still working, but it's tight for them right now.
I smell a revival of the carry a mortgage or pay off the house debate. I'm getting my matches and gas can ready.

The Benefit of Paying Off A Mortgage - Registered Investment Advisor
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Old 03-02-2009, 09:17 PM   #59
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Are 25-35 year olds feeling discouraged yet?
I dunno. I do know that some of us 55-65 year olds are.
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Old 03-02-2009, 09:57 PM   #60
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The inescapable fact is that had I been irresponsible with my money, spent more than I could responsibly afford on a house (and perhaps cashed in imaginary equity to fill that house with expensive toys) and took on zero investment risk in whatever I did save (i.e. just throw it into FDIC insured CDs) I would be enjoying a much higher standard of living than I am today.
You also could have spent the last several years stealing cars and robbing banks and been better off for it. There was a risk you'd get caught and go to jail, but there was also the risk of the government not bailing you out had you spent more than you could afford on a house.

I understand your frustration, but the right thing to do is always the right thing to do, regardless of how many other people are doing it. Would you have really felt comfortable living above your means and eventually placing the burden of your lifestyle on other people?
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