Economy

How to Outsmart Stock Market Instability

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Money coach Alvin Hall explains the recent stock market volatility and what it means for your financial outlook.

CHERYL CORLEY, host:

And it's time for money coach, where we check in with personal finance guru Alvin Hall. Last week, the Dow Jones Industrial Average and Standard & Poor's 500 Index took a steep tumble. It was a surprising decline that came after the Dow had a high closing in July. So what's behind the stock market dips and how can people safeguard themselves against these fluctuations? Well, Alvin Hall is here to give us his take on the market, and he joins us from our New York bureau. Welcome, Alvin.

Mr. ALVIN HALL (Author, "Profitably - in the Stock Market"): Thank you, Cheryl.

CORLEY: Well, let's talk about the Dow Jones and…

Mr. HALL: I know…

(Soundbite of laughter)

Mr. HALL: Frightening, wasn't it?

CORLEY: Oh, man, man.

Mr. HALL: Yes, especially for those of us who are in the market. It was frightening but not quite surprising, because the market had reached the top and for a long time people had predicted that it was going to break 14,000. And what happened then was people decided to take their profits.

And everybody I know kept saying it's going to drop, it's going to drop, and it did because there was all this profit taking. In addition to that, a lot of people had become very skittish about the subprime mortgage loan markets and the tightening credit that was occurring. So they, too, decided well maybe it's time to pull some cash out of the market, take some of the profits and sit on the sidelines for a while.

CORLEY: So how concerned, really, should we be about this?

Mr. HALL: Well, for most people it's going to show up in their 401(k) statements, which go out in a couple of days. So they'll notice that's there's a huge drop in the value of their retirement income. However, 401(k) programs are long term, therefore people should not be that worried about it.

I think for people who are entering the markets who were thinking about getting loans to buy first time properties, they're going to discover that the requirements are a lot tighter. And if you're somebody who is made jittery just by stock market turmoil, at any given time watching this value of your money fluctuate up and down, this is not going to make you comfortable at all.

CORLEY: Mm-hmm. Let me take you back just a little bit. You talked a little bit about, you know, some of the things that might be causing this fluctuation that we're seeing.

Mr. HALL: Yes.

CORLEY: The subprime mortgage crisis, of course, being one of them.

Mr. HALL: Yes.

CORLEY: Can we expect to see housing bounce back in any kind of way, or are we still going to see this kind of malaise?

Mr. HALL: Malaise?

CORLEY: Yes, yes.

Mr. HALL: Yes. I think the malaise is here for a while. I think there was just huge exuberance about people running out and buying properties they can't afford. And, of course, you have then a retrenchment in exactly the opposite direction, sort of the, you know, the yo-yo effect, right? We're going to loan you all this money, now we're going to pull back and we're going to make it harder to get credit.

So I think the malaise in the market is going to stay there for a while. And also you're watching as more and more companies are quietly laying off people or not replacing people as they leave. Again, people who are without a job, the amount of time that they're out of work is lasting longer and longer. And if they own a house, they may not be able to afford that house. They may have to put it on the market. So I think this is here for a while.

CORLEY: Uh-huh. Well, you talked about it a little bit, the whole housing market and, you know, how it might be a little more difficult for people to get the money they need to actually finance buying a home.

Mr. HALL: Yes.

CORLEY: Should folks actually be thinking of making that home purchase now, or should they just really wait?

Mr. HALL: I think they should wait. I think the market right now is so difficult to predict. Interest rates are headed up. Yes, you may have to rent a little longer and you may think that renting is a waste of money, but think of the cost of maintaining a house, every day-to-day expense. A friend of mine just had his roof leak. The windows in the back of the house had to all be replaced. Owning a house, you have to think about all those costs, too. View that as rent. If that's the equivalent of the rent you're paying, view it as a little blessing and stay where you are. And continue to accumulate money.

CORLEY: So renters are in a good place right now?

Mr. HALL: I think so. You know, I've been through this myself on a personal basis. I've done this. Everybody was telling me in the '80s, Alvin, go out and buy, buy, buy. I did not. I stayed there and accumulated money. And I kept saving. I stayed to my plan. And then when there was a substantial market pullback in the early '90s, I was able to go in and get a good property with a fixed rate mortgage that I could actually afford through good times and bad times. And that's what people need to do. Sit back and wait until you get that amount of money. Then see if you can continue to afford the property if something goes wrong. Project out. Don't just assume that happy days are here again because you get on the property ladder today. Things change in the future, as we're seeing now.

CORLEY: You're listening to TELL ME MORE. I'm Cheryl Corley. And we're speaking with our money coach, Alvin Hall, about the recent dips in the stock market.

Alvin, it sounds like you're saying that not only should people wait, but really they should stay away from anything like adjustable rate mortgages even if they go in to the housing market later on.

Mr. HALL: I think that for most people adjustable rate mortgages are too risky. I think you get in and you're seduced by that low payment, that low interest rate. And then when it starts to tick up, most people have not really projected out far enough to see if they can afford that. Keep it simple. Follow the KISS logic. Get the mortgage you can understand and afford and stick with that.

CORLEY: You talked a little bit about the impact on 401(k) plans.

Mr. HALL: Yes.

CORLEY: Should people be worried about that now at this point?

Mr. HALL: Well, it's a little too late to be worried after the crash.

CORLEY: Yeah.

Mr. HALL: Right now you have to remind yourself that it is a long-term investment. Retirement could be five years away, 10 years away, 20 years away. It's best to hold on to what you have. At some point in the future, if this has made you a little bit uncomfortable, you may want to go in and look and maybe move some things to fixed-rate investment as opposed to the stock market. But wait, cool down now, and then make that adjustment when there's less fear in your heart and soul.

CORLEY: So it really depends on where people are, though, at the retirement stage, doesn't it?

Mr. HALL: Yes, it really does.

CORLEY: I mean, if they are 10, five - so what can people do if, you know, if they're five years away from retirement or - let's look at it in blocks of time.

Mr. HALL: Okay.

CORLEY: If you're a short time away from retirement…

Mr. HALL: If you're a short time away from retirement, you may want to grab a hanky and start shedding a few tears because the money is - it may bounce back by the time you retire at the end of the year. So five years away is a reasonable amount of time. If this has made you nervous now and you've done well over the past five, six or 10 years, then maybe you want to look at shifting a percentage of your money into something more conservative. Preservation of capital - a key phrase - is the investment objective of the mutual fund. Remember that, preservation of capital.

If you're 10, 15 years out, then you can afford to ride out the ups and downs of the stock market for a while. So unless you are really nervous, unless you are really at the high-end of the risk spectrum, I would say hold on. Make small adjustments, but don't change course at every up and down of the stock market. Otherwise, you'll end up crazy and poor.

CORLEY: Alvin, we're talking about the stock market and you're saying that people should realize that, you know, it goes up and down, that's the nature of the stock market. But is the stock market just too risky for some people to even be involved in?

Mr. HALL: Yes. A lot of people don't like to see the value of their money go up and down. They would rather put it in the bank and watch it grow slowly, have it earn interest, see the money in the bank.

Once you've gone to business school and you studied how money really works, this is a hard concept for a lot of people to accept, that there are people out there who find comfort in seeing the dollars and cents in the bank. My relatives are a lot like this. They don't and should not invest in the stock market because the up and down just drives them crazy. If you are that type of person, if the thought of losing any of your money makes you nervous, gives you sleepless nights, causes you to toss and turn, then don't invest in the stock market.

CORLEY: So what do they do? You're not telling them to stick the money under the mattress, though, are you?

Mr. HALL: No. Put it in a bank and then chase high CD yields. You don't have to buy a 10-year CD. You can buy a six-month CD and roll it over, and continually roll it over. But you have to be diligent about the rollover and the money. We have all been conditioned to believe that the stock market is where all of us should invest. But if you are a person who are totally adverse to risk and cannot stand to see the value of your money go up and down, then maybe the stock market isn't for you.

And there's another point, too. I think that - and I see this a lot in the classes that I teach. Some people try to view the stock market as a way to get a guaranteed return. They want to come up with a scheme to eliminate all risk and only look at the up side. No such plan exists in the stock market. As you said earlier, it's the nature of the market to go up sometimes as well as down. And when it goes down, you will have losses.

CORLEY: Alvin Hall is a financial expert and our money coach. He joined us from our New York bureau. Alvin, thanks for joining us.

Mr. HALL: Thank you, Cheryl.

CORLEY: If you'd like our money coach and money train conductor Alvin Hall to steer you on to a steady financial track, get online and travel to our blog at npr.org/tellmemore.

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