Early Retirement Blog

Retirement investors should be cautious following Thursday’s 400 point stock market rally.  After two days of plummeting share prices, the 4% rally on September 18, 2008, shows all the indications of being a dead cat bounce.  What is a dead cat bounce? Wikipedia describes it as follows:

“A dead cat bounce is a term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals of the stock. It is derived from the notion that “even a dead cat will bounce if it falls from a great height”. ”

The dramatic turn-around in the Dow and Nasdaq, came in response to word that the U.S. Government is considering creating a fund to absorb the financial industry’s bad debt, the rise in the stock market did not come about because there have been any positive changes in the U.S. economy. The suprise announcement by Treasury Secretary Paulson, that the American taxpayer will foot the bill for Wall Street’s crimes, caused the stock markets to shoot up.

This decision to bail out Wall Street, by the Federal Reserve and U.S. Treasury will force average Americans to face, higher taxes, reduced government services, and lower incomes.  The nation has been down this road before.  In the 1980′s the U.S. Government created the Resolution Trust Corp., to assume the the bad debts associated with S&L scandal, to which John McCain (it should be remembered) was a party to.

It can be debated, and it will be debated, whether bailing out Wall Street Crooks is good economic policy.  However, it should be noted, that the 1990′s Japanese Government’ refusal to liquidate their banking industry’s housing bubble’s bad debt, led to a decade of virtually no growth in their economy.

How does all the recent financial turmoil, affect people who are planning for retirement, or are already retired?

Already Retired
If you have a Green Retirement Plan, you understand that the amount you can safely spend in retirement  is calculated, by using the worst 30 year period in the stock and bond markets, including the great depression of 1929.  However, if the recent declines in your net worth are making you feel uneasy, cut back your consumption by 10%.  If you have a retirement budget of $3000 per month, reduce it by $300 per month, until you feel more confident about the economic future of the United States.

Planning Retirement
If you are planning your retirement, the crash of the housing and stock markets may have significantly reduced your retirement net worth, causing you to panic and search for ways to save your retirement portfolio.  You may be considering delaying your retirement, moving your money out of the stock market, or making risky investments.  Don’t panic.

Understand that retirement investing, takes years not days, and that good economic cycles and bad economic cycles are involved.  Keep to your plan, don’t change your asset allocation (assuming it’s correct), or make any drastic decisions. You may want to actually increase your investments, taking advantage of dollar cost averaging, and reduce your estimated retirement budget to keep your planned retirement date.

Here are a list of articles on the retirement blog about dealing with a recession in retirement.

Recession in Retirement – Don’t Delay
How to Earn Big Returns in a Recession
Recession Proof Retirement
In a Recession Accelerate Your Retirement
Lost Your Job – Think Retirement
Retire in a Recession

Even though, I suspect that Thursday’s stock market rally is nothing more than a “Dead Cat Bounce”, their is no need to panic and make unwise decisions.

Green Retirement Planning enables people to retire with less savings and earlier, than is possible with traditional retirement planning, by calculating the positive benefit to your retirement from practicing conservation – Go Green.