Money Obedience

Stock markets usually don’t do well in September. Since 1959 stocks have declined an average of 0.9% in September, which makes it by far the worst month of the year. (In case you care, December and April are the two best months of the year, up about 1.5 and 1.4%, respectively.)

So much for the facts. I don’t think this information helps much. Why not? - Well, let me ask this question. Would it make sense to sell on the last day of August and buy back on the last day of September? – At first glance you may say yes. But when you take commission and taxes into consideration, you may decide against it. Besides, what if this September is different than other Septembers? How often would you be willing to go through this exercise year in and year out?

Moving money in and out of the stock market for relatively short periods of time is called “market-timing.” According to most studies, this strategy has not worked out very well for most investors. Instead, the way you split up your money among the various investment choices makes a real difference. This is called “asset allocation” and it impacts about 90% of your financial success. So, why would you mess with “market-timing” in the first place? It is much more important to get asset allocation right than to get market timing right.

However, I can see one big benefit for knowing that the stock markets go down 0.9% on average in September. That is, we can prepare ourselves for a little setback in prices – just in case this setback actually happens. If it does, it would not be a big shock if stocks actually declined this month. We would all avoid panic, which certainly caught some of us during the recent decline ending in March. Panic does not set in if we are mentally prepared for a decline in the stock market – which really can happen anytime, not just in September, as we all know now!

A few months ago it looked like the stock market would go to zero. Investors were pretty scared because then it seemed like there was nothing out there that would stop the decline of the market. One of my friends panicked during this period and sold all his stock holdings close to the recent lows in March. He then moved some money back into the market after the market had bounced some 20-25% off the lows. Now he is back “in the market” albeit with less of his savings invested in stocks than before he sold out. He obviously lost out on much of the rise, and this is the core problem.

I was reminded of my friend’s unfortunate timing by an interesting statistic in the Charles Schwab summer newsletter. It calculates that you would have $29,382 now, if you had invested $10,000 20 years ago. It then goes on to calculate how much money you would have if you had been out of the market on the best 10 days of these 20 years. You would have only $15,123, or about half as much. Imagine that! You stay out of the market for only the 10 best days in 20 years and your savings would have grown so much less. Your gains would amount to only $5,123 versus $19,382 if you had stayed invested the entire time. How about this one? If you had stayed out of the best 30 days in the last 20 years, you would have actually lost money overall: your $10,000 investment would be worth only $6,531!

What conclusion can we draw from these numbers? If you make the decision to have some of your savings in the stock market, just stay with this decision, and ride the ups and downs. Your initial decision to invest is based on your risk attitude, and that should not really change with the whims of the market. We all know that stocks go up and down. That is why it is important to stay invested even when the markets go down. (The last couple years have taught us that there is no such thing as a free ride when it comes down to investing whether you put your money into stocks or real estate.)

You don’t just want to be in the stock market when it goes down. You want to make sure that you benefit from the few days a year that make investing a worthwhile savings strategy in the long run. My friend learned the hard way that you have to make sure you invest a portion of your savings in the stock market that allows you to sleep peacefully. Luckily, he now has invested an amount of money that will not lead him to panic should the market decline again. That level of comfort about what our money is doing is what we should all be feeling.

This is our weekly roundup, where we share some interesting posts written by personal finance bloggers we follow. As always, when we list a post in this roundup we stick with our favorite themes: setting up a budget, household expenses, lower debt, and general personal finance topics that can aid in reaching financial goals. We hope that you enjoy the insights of these blog posts!

Setting up a Budget and Household Expenses

Unplanned Expenses and Your Budget - Flexo tells us how we can include unplanned expenses in our budgets. He also suggests ways to pay for such expenses.

"More Month Than Money: Tightening Your Food Budget While Feeding Your Family Well" - J.D. discusses an e-book called
"More Month Than Money: Tightening Your Food Budget While Feeding Your Family Well" that describes a frugal approach to feeding a family well.

Saving Money The Easy Way. - David tells us how he managed to save money even when his finances were in bad shape in the past.

Lower Debt

Credit Scores Matter More Than You Think - This post lists a few areas (beyond your ability to get credit and affect the interest you pay for any loan) affected by your credit score. You should know that your credit score comes into play when you get an insurance policy, find new employment, or even sign up for a cell phone plan.

How Credit Card Companies And Credit Repair Firms Deceive Consumers - This post shares with us some of techniques harmful to the consumer that some credit card companies and credit repair firms use. It also tells us how to avoid some of the traps some of these companies lay out for us.

Monthly Debt Reduction & Savings Statement - May & June 2009 - “Playing Catch Up” Edition - This blog shares with us the road to a debt free life. It's interesting to follow this blogger's progress, which you can do because he holds himself accountable for what he's achieved since his last update.

Investing

How Turnover in Your Portfolio Affects Performance - Mike tells us why it is better to invest in funds with low turnover ratios.

Your Home is Not an Investment - Don’t Treat It Like One - Jeremy points out that your home may be your most important asset, but that you still should not treat it like an investment. He makes his point by walking us through the financial details of home ownership.

Miscellaneous

Why Naming Beneficiaries Is Important - Jeff emphasizes that it is very important to name beneficiaries for various assets you own. If beneficiaries are named it is a lot easier to pass assets to the person of your choice, when you die.

A lesson from my German teacher - "Better late than never" is a good adage to apply to your personal finances.

This is our weekly roundup, where we share some interesting posts written by personal finance bloggers we follow. As always, when we list a post in this roundup we stick with our favorite themes: setting up a budget, household expenses, lower debt, and general personal finance topics that can aid in reaching financial goals. We hope that you enjoy the insights of these blog posts!

Setting up a Budget and Household Expenses

Spend Less Than YOU Make: Taking Responsibility by Saving for Serenity.

Tips for Hosting a Dinner Party by fivecentnickel.com.

My First Budget: Drafting a Plan for Discretionary Spending by Get Rich Slowly.

Should you try to reduce your rent? by Wisebread.

How to create a workable budget by Blunt Money.

Savings

Build An Emergency Fund To Avoid Financial Crisis by Moolanomy Personal Finance.

Lower Debt

Debt Reduction – It’s Not the Method, It’s the Plan by Suburban Dollar.

Investing

Joining An Investment Club? Watch Out For Groupthink by Manshu of MintOne.com on Digerati Life.

How My Retirement is Currently Doing? (June 09 Update) by Green Panda Treehouse.

When to Adjust Asset Allocation by The Oblivious Investor.

Miscellaneous

How in the world did I get here? - An historic roadmap to better personal finances by Gather Little by Little.

Would you fire me? by OneMint.

How Your Personality and Past Affect Your Money Habits by Man vs. Debt.

Three Steps to Choosing a Financial Adviser by Free Money Finance.