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Starting the New Year with a Fresh Look at Personal Finance

Where are we now?

"The greatest mistake that 98% of all investors make is never spending any real time trying to learn where they made their mistakes in buying and selling stocks," writes William J. O’Neil founder of Investor’s Business Daily, in his best-selling book How to Make Money in Stocks. Most of my articles posted here last year encouraged a great deal of self directed education, particularly with regard to developing a selection process to optimize the performance of our investments. Mr. O’Neil’s approach parallels some of the best advice we can get on personal investing, particularly in his strong recommendation that we evaluate our own performance. Look at the successes as well as the failures to determine both what went right and what went wrong.

In the coming weeks many will be receiving various year end statements: 401k accounts; brokerage accounts; bank accounts; IRA accounts. Usually these statements are tucked away until we begin the drudgery of compiling our personal income tax returns, or they are placed in a large brown envelope to hand off to the accountant for the same purpose. Given the disastrous economic climate of the last 18 months, my suggestion is that we open all of these statements as quickly as possible and begin the review of our own performance. Perhaps some investments were based on “tips” from friends or co-workers; maybe we hold some investments simply because we have had them for years. Neither case is a valid reason for buying or holding an investment. The only criteria for buying and holding stocks should be based on the return the investment provides to your portfolio compared to alternate investment opportunities.

The activity in the stock market for the last 2 months reflects the fact that many are taking a “wait and see” attitude at this point in time. If you have followed the “market” you will know that we have been bouncing off the “post financial crisis” highs for many weeks. I chose to capture the term “post financial crisis” in quotations simply because my perspective is that we have not yet turned the corner toward overall financial market health, so I am not sure that the financial crisis is over. I have purposely delayed this article in order to include the jobs report from Friday January 8th in my perspective. Most of last year I had stressed that the financial market recovery would depend heavily on the eventual improvement of our unemployment picture, and the January 8th report did not offer any encouragement on that front. The economy continues to lose jobs, having shed 85,000 more in December. This fact warrants caution for the stock market in the near term, yet does not preclude continued evaluation and analysis.

What to do next

It is a perfect time to take Mr. O’ Neil’s advice and have a look at what we did in our personal financial portfolios over the last year. As most portfolios suffered some severe losses last spring and have made sizeable improvements since that time, maybe there is nothing to do right now. However, many investors sold out positions on the way down last year, and have yet to add any investments back to there portfolios. If you have mostly cash in your accounts, it is a good time to study various stock selections and to be prepared to add some solid companies to your portfolio on any weakness from these levels. Your BCU investment advisory team can offer a number of suggestions, and you can do some “homework” on your own to support any purchases you decide to make. The key is preparedness, so take the time to study the possibilities and make some tentative decisions now. That way you will be ready to buy when the market offers opportunity.

For those with large cash balances, hopefully the money is not all in short term money market funds which are paying almost nothing in current returns. Check the BCU rates on certificate savings, or maybe the local rates in your community. Cash balances will do much better in 3 year to 5 year CD’s than they are doing in money market accounts. With CD’s the money could be made available before maturity if better opportunities present themselves, although you may have to endure the penalty of some loss of interest to access the money. All such details are made clear by the insured institutions who offer these products.

What about a new Home?

Most have witnessed first-hand the devastation in real estate prices. However, there are some opportunities in this market given the current landscape. Prices have fallen dramatically; mortgage interest rates are at near record lows, and the government has extended a substantial credit for first time home buyers. These are precisely the ingredients to provide a real estate investment opportunity, especially if you have been considering that first home purchase. Very rarely will we pick the bottom of a market, and we may yet see an increase in foreclosures and more pressure on prices over the first 6 months of 2010. However, with the government tax credit and the low mortgage interest rates, those with significant down payments available and some reserve savings face far less risk of adversity in buying a new home now than at any time over the last 10 years. While our personal residence is not an investment per se, it does provide a storehouse of value and a potential source of retirement funding down the road.

In summary, it is a very good time to review our recent personal financial history and to seek to make changes where necessary going forward. There is value in both a strong offense and a strong defense when it comes to our investment dollars. Since we have all learned lessons from the market activity of the last 18 months, we should put that new knowledge to work going forward and improve our skills in managing our personal financial futures. As I have written before, there are always good investments to be made. In the heat of the financial market meltdown, some stocks held their own and even increased in value. With some effort and a little help from a professional financial advisor we can find the stocks and other investments that will carry us through the current economic climate with the greatest possibilities for success, or at least the smallest likelihood of failure.

©Patrick J. Catania 2009
The views and opinions expressed herein are solely those of the author and do not necessarily reflect those of Baxter Credit Union, its Board of Directors, or its employees. The author is responsible for the content. Readers should consult with, and seek professional advice from their own attorneys, accountants, and financial advisors with respect to their individual financial needs and circumstances.

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