Bills, ETFs, Interest Rates, Retirement, Stocks
March 08, 2020
Listen to Podcast Episode:
In today’s podcast, Suze explains what happened with the stock market this past week and why it’s still so important to stay calm.
It's March 8, 2020, and before I continue on with the recap of the stock market and why everything is happening which really, I have no idea, but I'll try to give you a logical explanation and what I think you might want to do and not to. I just want to say Happy Women's Day, everybody, and the men smart enough to be celebrating with us as well. I love when we have this day because every woman should be celebrated all the time if you ask me, but I'm glad we have at least one day where the entire world does so. Also, if you are curious who won, who won that money makeover, we all entered it, but who won? Well, Patty Markowitz won it. And on Wednesday, Patty, I will be talking to you one on one and redoing your entire financial life. But I thank all of you who participated in that. And, I'm going to congratulate myself here because I was just notified today that number one, the PBS special is blowing out the door, meaning it is pledging, wonderfully, raising a lot of money for PBS. And I love that because I think PBS is so important to keep going, I can't even tell you. And last but not least, I was also notified today that Barron's, one of the premier financial magazines that everybody reads all the time if you're into serious investing, named me to the list of 100 most influential women in finance in the United States. So I love that they honored me because normally people who talk about personal finance, the way I talk about it and everything, sometimes they just don't pay attention if you're not a hedge fund manager or this or that, or seriously managing money, it's like it doesn't matter. But it mattered to Barron's, and that was a tremendous honor. All right, let's start. I get very well that this was a really bumpy week, down 900 up 1200, all across the board. Up, down, up, down, up, down. But I just again need you to keep everything in perspective because truthfully, on February 28, after that first, seriously chaotic week, the market closed at 25,766. OK. And then on March 1, I gave a podcast telling you what I thought about that. Here we are now and the closing on March 6, one week later of the stock market, the Dow Jones Industrial Average was at 25,864. It actually went up 100 points overall from where it was the week before. So, if you had invested in index funds and things like that, you probably would be a little bit ahead right now than possibly you were a week ago. Where you got hurt, where you get really hurt, is when you are invested in individual stocks and some of those stocks, if they're airline stocks, if they're cruise ships stocks, if they're, you know, a variety of stocks like that, you were obliterated. You weren't down just five or 10% or whatever, some of them are down by almost 50%. And when that happens, we have a problem because when something goes down 50%, something goes let's just say from 100 to 50, it has to go up from 50 to 100. That's a 100% increase.So hopefully, all of you have been listening to me over all of this time and you have been in index ETFs or mutual funds and that you haven't been hurt that much. I also have been telling you that if you have time on your side, you have at least 10, 20, or 30 years until you need this money and you just keep dollar-cost averaging in every single month, that I promise you in about three years or so, you will be so happy that you did. And why do I keep saying three years? Because truthfully, for the past almost 100 years now, that it's taken about 3.1 years when something like this happens from the market to go from its very high down to the very lowest point and back up to the high. So if you have time on your side, just sit this out and keep dollar-cost averaging, and you will be OK. Especially if you are in a 401k plan and you have time on your side, can you just keep doing it? And it could very well get very more painful, it really, really can this year. However, I do think in the year 2021 will kind of start to balance out, and then in the year 2022 and 2023 we should see things starting to come back up and we will be OK again. However, there are some of you out there, some of you out there that had a lot of money in the stock market and you didn't want to come out. You need this money to live on because you're absolutely retired. You don't know what to do, and even though a lot of things have gone down, most likely, most likely, you are still up from where you invested. You know, over this last decade, you've averaged, if you were in the Standard and Poor's 500 Index or things like that, you've averaged about 14.7% on your money. So over all those years, if you've been doing it, you haven't lost money, you've just lost some of your gains. And I get that that hurts you. You know, I don't understand why all of you get so much more upset when you lose money that you were gaining than you do losing your own principle. I don't know, you just seem like it upsets you more because you felt richer and now you don't feel as rich.So, if you are out there and you really need this money, you're taking money out all the time to pay your bills because you're living off of your income from this portfolio. Or, you're taking principal out, I'm telling you, you might want to think about if we have, an increase again. And I told you this last week if the markets went up, did I not tell you if you needed this money (and twice they went up almost 1200 points), did I not say to you if they went up, take the money and run? So, you're going to have to decide what you want to do. But if you have time on your side, just OK. And if you don't, you're going to have to make some decisions here, because if you're withdrawing 3%, 4%, 5% a year to live on, I'm not sure that this is where you should be. However, before you make any moves you have got to take into consideration the tax ramifications of selling if you have money outside of a retirement account. OK? And if you don't know why, please listen to the March 1 episode where I go into great detail about that. The other thing that I want to talk to you about is that you know, a lot of times when I say things on these podcasts, do you listen? And it's really important that you listen to every single one because you never know when I'm going to say something and I'm going to suggest to you that you should do this. And when I tell you to do something, it's because I myself I'm doing it too. But normally, the things that I'm telling you to do are things that can't affect the markets. So, it's not like I'm telling you to buy a specific stock because I already bought that stock and I want you all to buy it so that it will go up so I can make money. So, what am I talking about here? On September 1, 2019, in fact, it was episode 67 of season two, and at about 17:10 into that episode, I tell you about the 30-year Treasury bond. And as that episode goes on, I then suggest to you it's something that you might want to think about, and I give you a little bond lesson there: "Right about now, a 30-year Treasury bond is paying approximately 2% and you are thinking there is no way in the world that I want to invest and lock in a 30-year Treasury bond yield at just 2%." Right at that date, I myself put a serious sum of money into the 30-year Treasury bond. It was paying me 2.2%, that's all it was paying me. And I told you in that episode that if the Federal funds rate went down and the interest rate on these Treasuries went down just 1%, the Treasury bond itself would increase in value about 15% to 18% and you could sell it on the open market: "So if the Fed lowers interest rates, if interest rates go down and Treasuries a 30-year treasury all of the sudden is only paying you 1%, it is possible that the Treasury that you currently own could go up 10%, 15%, or 18% in value and you could sell that on the open market if you wanted to." And that is exactly what I did on March 6. When I sold, I literally made 17% on that investment. So rather than losing money in the stock market, although I have a lot of money in the stock market as well but I'm fine with where it is, I made money on a Treasury bond.Now, somebody wrote in and they said to me, Suze, I heard you a week ago on Hoda and Jenna and you said, no, no, now's not a good time to buy bonds. But why isn't it a good time to buy bonds, where else should I go with my money? So just for another little lesson, again, the reason why it's not a good time to buy bonds right now is the rule of thumb that when interest rates go up, the value of bonds goes down, and when interest rates go down, the value of bonds go up. We right now are in a situation where the 10-year Treasury note is paying the lowest interest rate it has ever paid in the history of Treasury notes. It's paying about 0.7% interest. It cannot go down much further, so I don't want you now because I told you to do something on September 1, 2019, now I'm telling you, this is not the time for you to buy individual bonds.While it is true that most likely the Feds are going to take us down to 0% interest rate, maybe they will, maybe they won't. But this isn't the time to do that. Now is the time, if you want your money safe and sound, just put it in high-yield savings account at a credit union, or an online bank, or wherever you need it to go to be safe and sound. Please remember everybody, that the maximum FDIC insurance or the credit union insurance is $250k. So don't go putting a whole lot more than that in one financial institution, OK? So now what do you do, where do you go? This is why if you got my book, The Ultimate Retirement Guide for 50+, you will find when you read in that book that for the first time ever I suggested that most of you not have an eight-month emergency fund if you are in retirement or if you are approaching retirement. And if you're younger and you're listening to me, remember that I've said this to you. So, I've now suggested that you have almost a three-year, your eight-month emergency fund, of course, and then another two to three years off a cushion in cash besides that. And all the shows that I was interviewed on last week, they were like, you've now gone to three years, Suze Orman? Like, what's wrong with you? Why can't we just have eight months? And everybody else is like, other financial so-called pundits, are saying three months, eight months. Now you understand why. Because now that the market is going down, this is not the time that I want you to sell, especially if you have a taxable event, even if you're within whatever time it is until you retire.Now, obviously, if this is money that you seriously need and you don't have a cushion, OK, you don't really have a choice. But if you had listened to me and if you had a three-year cushion, why a three-year cushion? Did you not just hear me say to you that usually, over the past 100 years, it takes 3.1 years from the market to go from the high to the low and back to the high? So, if you had a three-year cushion and you could just take that money out every month from your cash to pay your bills, then you wouldn't have to be liquidating stocks when they have already gone down significantly for some of you. Do you see that? So, I want you to remember that.Now, how do you figure out what that cushion should absolutely be? When you go into retirement, you may have a pension, although probably you don't. You may have Social Security going on for yourself if you listen to me and you're not gonna retire to your least 70, and that's known as guaranteed income. So, I have again in this book, The Ultimate Retirement Guide for 50+: Winning Strategies to Make Your Money Last a Lifetime, and I'm not just saying this so that you buy the book. Go to the library and take it out. You know, just do something. But I explained to you for the very first time in this book why it is essential that you have what I'm calling "guaranteed income." Because if you don't have enough guaranteed income to cover your expenses that you're going to have every month, then that's when you normally go to your stock portfolio or your retirement accounts and you start withdrawing from there. But you can't withdraw from there if all of a sudden we have a market that's going down and down and down because it's not the wise thing to do. So, that's why I wanted you to have again that three-year cushion of cash. So, how much do you need to figure out what that three-year cushion of cash should be? Let's just say, and you can play this podcast over and over again so that you can understand this. Let's just say you need $50k a year to live on in retirement and let's just say you have $25k a year guaranteed to you of social security. Now, let's just say you also have $10k a year of a pension or something like that, guaranteed. So, you're needing $50k and you have $35k of guaranteed income, so you are short $15k a year from you being able to meet your expenses. OK? So then you times that $15k by three, which would be $45k, and that's the cushion I want you to have. And the time that you start creating that cushion is five years minimum before you're actually going to retire. So that when times like this happen, you don't have to go selling your stocks, you don't have to worry about it and that you will be OK. Now, you also heard me say that I went into the stock market last Friday, I bought when it was down considerably. So, not March 6, but on February 28. And so you heard this on the March 1 podcast, and I'm thrilled that I did. Because I like the stocks that I bought and I got news for you, they did not go down. But I also told you, and I'm repeating this, I did not go in with everything that I have. I'm going in little by little because I absolutely expect that this market will continue to go up, to go down, and will probably go a lot lower from here I'm sorry to say. Maybe yes, maybe no, but I'm also happy to say that if you have time on your side and you dollar-cost-average, this is going to create a marvelous buying opportunity where wealth will be created a few years from now. What I am starting to buy right now are oil stocks, and I'm buying them because they have been obliterated. They haven't been this low since I can remember and I like the dividend yields that I'm getting. I'm getting 8%, 9%. There is an ETF by the symbol XLE that is paying almost 9% in dividends. So, it's something that you might want to look at. Now, could oil go down even further? Oh, you bet it could. So, if it's something that you're thinking about doing because I personally think over this next year you're going to see oil stocks, as well as pharmaceuticals and probably Bitcoin, by the way, might have a good year out of all the stock categories. But don't go investing in individual categories unless you have a whole lot of money and a lot of diversification. So, if you're investing and you just want to be safe and sound, just stick with the Standard and Poor's 500 Index Fund or ETF, or the Vanguard Total Stock Market Index fund or ETF, or even the Motley Fool 100 Index (symbol TMFC). Stick with things like that. But if you have a little extra money and you just want to see what happens then just to put small, small, I don't even care if it's $100, small amounts of money into the XLE and just kind of see what happens there. OK? But you're going to have to wait, and it will probably go down before it does go up. Stocks that I think are very dangerous, and I know that many of you may be really tempted to buy the airlines. I wouldn't be buying the airlines right now, I would not be buying the cruise ships right now, and cruise lines, I just wouldn't because we're too new into this. We do not have a clue how many people have the Coronavirus, we do not have a clue because we do not have the testing kits. We have 75,000 testing kits that are out there. So, I really think we need to be careful. Now, I hope that it is not as bad as everybody is thinking that it's going to be. But until we know, just go slowly here and don't make any moves that are rash. Such as selling out of everything in your 401k even though you're only 35 years of age, don't do it, don't do it, don't do it. But again, I'm stressing that you have got to be diversified, so that means the index funds or ETFs are the best way for you to do that. The other thing, I'm just going to say this that we do have going for us, believe it or not, is that (I know you're not going to quite believe this) President Trump needs the market to go up. He needs it to increase because if it continues to go down, the one platform that he has been running on which is the economy and the stock market, if it doesn't perform well, he has a good chance of not winning in November. So, it is important that he probably take as many moves as he can to make the market go up. Now, he wanted the Fed funds rate to go down because usually when the Fed funds rate goes down, that spurs the market to go up. But no, that day it dropped tremendously, why did that happen? Because it scared everybody, because they weren't in session, it was a mid-session cut. So everybody went, oh, if they're cutting interest rates, it's really not good out there. But, here's what's good about them cutting interest rates. Forget about the stock market now, forget about those things because right now your job is to conserve as much money as you possibly can. And do you know that interest rates on mortgages are the lowest they almost have ever been? You could even get like a five-year mortgage right now for like, 2%. But really, you could probably get a 15-year fixed for about 2.5% and a 30-year fixed for about 3%.So, if you are out there and you own a home and your mortgage rates are above that, you're at 4%, 4.5%, whatever, you should think about refinancing. But, do not make the mistake of refinancing for longer than the term you currently have left on the mortgage that you have. So, if you have a 30-year mortgage and you've been paying it down for five years, you have 25 years left. Do not refinance for 30 years again. Refinance for a 20-year and reduce the length of your mortgage if you refinance, even if that means that you pay the same amount of money that you're paying per month. In the long run, you will save tons of interest because you have shortened the period that you are paying. Also, do not refinance your house if you do not plan to keep your house long enough to recoup the closing costs on your home if you refinance.An example: you refinance and let's just say it costs you $6k to refinance and you will save, let's, say, $250 a month in your mortgage payments, but you're going to sell the house in one year. One year at a $250 a month savings with your new mortgage payment is $3k. But, you paid $6k to refinance, so you're still $3k in the hole. So, make sure that you're going to stay in the house long enough to recoup your closing costs on the savings in your mortgage payments if you refinance. So, you should be looking at everything right now that you're paying an interest rate on and what can you do? Can you get a lower interest rate on your credit cards? Can you get a lower interest rate on your car loan? What can you do to take advantage and lock in these low interest rates here? So that's an advantage for you because that way you will save money. The more money you can save, the more money you will have to possibly even dollar-cost-average into this market little by little. And I'm telling you, tiny amounts. Got that, everybody? All right, I'm looking at the time here and we are almost at 30 minutes and you know that I always think that 30 minutes of listening to me is probably the max that you have. So, just stay calm, all right? Stay calm. This is going to be a very, very bumpy road. Actually, before I end, this is what I want to tell you because a lot of you are writing in and going Suze, are we going to go into a recession? Listen, if people stop spending money, 2/3 of the economy is made up of consumer spending. If this virus is scaring everybody from traveling, going to restaurants, going to movies and all of those things, then yeah, it's going to start to hurt the economy. It already has, and there will be many businesses that aren't going to be able to survive it. You know, a restaurant is, you know, how long can they go without customers going in before they don't have money anymore? So it could be rough because of that. So it just depends on how long this continues and are they going to say to us, we cannot go out? We can't do anything? You know, I have a friend that works for the United Nations, and he just came back from South Korea and he said, Suze, I've never seen anything like it, it's a total ghost town everywhere. Nobody is going out, it's like the streets are empty. And if all of a sudden the virus gets bad and they say we can't go out, we can't do this, we can't do that, and they do the same things here, you can't send your kids to school. That is going to have ramifications on the economy and that could put us into a recession. So, we just have to see what happens there.And the last thing I just want to say about that is, I understand that the jobs report on Friday was absolutely magnificent and that actually more people got jobs than lost jobs. Fabulous. Here's the problem. The majority of those jobs that made up the job report where low-paying jobs at restaurants. So, if this continues, will those restaurants be in business and will all those people still have those jobs? I don't know, but I have given you a lot of food for thought here. So, you now know what I think. I think you should stay calm. You might want to repeat March 1 as well as this podcast over and over again. Listen to the podcast that I mentioned and the things that I have told you to do, but just know, it was for then not necessarily now. So don't mix up and always pay attention to the dates when I'm telling you to do something. And just do me a favor, don't miss a podcast because you never know when all of a sudden I'll say OK, now is the time. Now's the time to go back in, now is the time that everything is going to be OK. So just stick with me here and hopefully, I'll guide you to exactly where you need to go. In providing answers neither Suze Orman Media nor Suze Orman is acting as a Certified Financial Planner, advisor, a Certified Financial Analyst, an economist, CPA, accountant, or lawyer. Neither Suze Orman Media nor Suze Orman makes any recommendations as to any specific securities or investments. All content is for informational and general purposes only and does not constitute financial, accounting or legal advice. You should consult your own tax, legal and financial advisors regarding your particular situation. Neither Suze Orman Media nor Suze Orman accepts any responsibility for any loss, which may arise from accessing or reliance on the information in this podcast and to the fullest extent permitted by law, we exclude all liability for loss or damages, direct or indirect, arising from use of the information. To find the right Credit Union for you, visit https://www.mycreditunion.gov/.
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