Ask Karen Gibbs

Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

2

March

Invest Smart!

Karen Gibbs

Hi Karen, it seems that the U.S. economy is on the mend, but events overseas cause the stock market to gyrate.  How do external events affect our economy and how can the average person make smart investment choices?  Sarah, Harford County

 

Investment Tree

Thanks for your question Sarah.  After six years, the economic recovery does indeed seem to be taking hold.  Unemployment has fallen from 8.9% in 2009 to 5.6% today.  Gross Domestic Product, a measure of all the goods and services produced in the U.S., has reversed a -8.9% contraction with the economy now growing at a modest 2.6%.  The budget deficit, the difference between national revenues and outlays, has shrunk to $483 billion, down from $1.4 trillion in 2009.


The two sectors that drive our economy, housing and autos, have recovered from their implosions with auto sales showing year-over-year growth across the board.  Home sales show a healing housing market supported by historically low mortgage rates.


Lower prices at the gas pump are freeing up extra money for households suffering from stagnant wages.  This money can be used to pay down debt, shore up savings or increase purchasing power.


However, events overseas can cause our stock and bond markets to gyrate wildly as international investors look for safe havens for their money.  This “flight to quality” can be reversed as quickly as it appeared and we have no control over either the events or the international reaction to those events.


All we can control is our own personal economy.  It means we must continue to spend less and save more.  When you have control over your day-to-day, month-to month finances, you’re able to better absorb financial shocks, from car repairs to terrorist attacks.


Since we don’t know when or where the shock will come, it’s important to diversify your assets to reduce your risk.  Diversification means not putting all your eggs in one basket.  You should have your assets spread among cash, bonds, stocks and, for some, alternative investments such as gold and/or real estate.


We also don’t know what asset international investors will deem most safe when faced with global financial turmoil.  Gold has lost some of its luster as a traditional safe haven, but still sees investor interest.  The plunge in global crude oil prices has hit citizens of oil exporting countries especially hard, hurting their savings and purchasing power.  Many may stash their cash in our ultra-safe treasury securities.  Others may look at our growing economy and choose to invest in U.S. company stocks.


That’s why you should have a mix of assets in your investment portfolio.  You can ride out the turmoil with less risk than if you put all your money in stocks or bonds.


Bottom line Sarah, keep a close watch on your spending. Don’t spend more than you earn.  Save and invest the money left over on a regular basis, and don’t touch it unless you absolutely have to.  Let your money work for you and enjoy the financial freedom to make smart choices, enjoy life and reach your long-term goals. 


Good luck!

 

Karen

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