A Down Market Has Its Upsides for Young People

By Anya Kamenetz

Sometimes what seems like bad news can be turned into good.

All the recent talk about the faltering economy certainly seems to fall into the bad-news category. Housing prices had the biggest decline ever, the U.S. and international stock markets had some very dark days, 17,000 U.S. jobs unexpectedly "disappeared," and many experts feel that we're heading into a recession.

But there's reason for young people to look on the bright side. In fact, beginning your financial life during an economic correction or downturn can be a preferable thing in many ways. Here are a few of the positives:

1.) We won't expect to get rich quick.

Economic dramas shape an entire generation's beliefs about the nature of the economy and the risks involved. Just ask your grandmother, who experienced the Depression and is probably still saving rubber bands.

If you're in your 20s or early 30s, your living memory consists of a nearly unprecedented runup in stock market values -- the tech bubble of the 1990s. Bubbles by definition get people excited about making lots of money, fast. Thanks to the Internet, millions of people were able for the first time to pick, follow, and trade stocks for themselves. Unfortunately, the common outcome could be summed up by the title of film critic David Denby's book: "American Sucker." An affluent, well-connected New Yorker with ties to top stock analysts, Denby lost over one million dollars gambling on tech stocks.

Investors like Denby, who try to get rich quick by picking individual stocks, exemplify what is known in the investment world as "dumb money."

It's nearly impossible for you and me to beat the market consistently. And commissions, as well as trading and research costs, tend to eat up your returns if you try. It's a great lesson to learn by example -- not by experience.

You can also learn some lessons from the downturn of the housing market. In the past decade, it became much more common for first-time homebuyers to borrow big and hope to flip within a few years for huge appreciation -- 50 percent and up. But if you buy a house these days, you'd better love that city and that neighborhood, not buy more than you can afford, and be prepared to hold onto it for a long, long time.

2.) We'll get real about consumption.

Think about this: Consumer spending increased every year for the past 16 years. That's the longest buying binge Americans have ever gone on.

This spending increase was largely fueled by the runup in house prices, which allowed home-owning Americans to borrow against the cost of their homes. Consumer credit also expanded markedly over the past decade and a half.

For those of us in our 20s, this may mean that our parents borrowed against their home to send us to college or to pay for vacations or other luxuries while we were growing up. It also means that credit cards have always been there to fill the gap when we wanted a pair of shoes or a restaurant meal. Young people have been spending 16 percent more than they earn in recent years -- not a sustainable situation.

Well, now the credit market is tightening. As long as house prices are falling, not rising, home-equity loans will be harder to get. And in the general atmosphere of a recession, out-of-control spending tends to slow down as everybody tightens their belts. For example, this past holiday shopping season was the weakest in five years.

But did it really hurt your celebration with friends and family if the presents were a little less lavish?

3.) We'll buy on the cheap.

The current scary economic environment should not cause you to stuff your money under a mattress. The stock market may not be the best way to make a fast buck, but it is still the best long-term investment for your money; market returns average 7 percent to 10 percent over the long term (although your mileage may vary based on investment costs.)
And the "long term" means decades, not a few years.
Even with the recession in 2001-02, stock prices never really corrected to historical norms, which means they may still have a ways to fall. According to David Leonhardt of "The New York Times," the stock market is currently "overvalued" by 10 percent, relative to historical norms. And in a recession, the market sometimes plunges more than it should because of the mood of the investors, rather than because of underlying economic indicators.
That's bad news for people who are retiring now or in the near future. Your grandfather might have had a million dollars if he cashed out last year, and only $800,000 today. But it's good news for the average 25-year-old. You have most of your stock-buying ahead of you. You'll ideally be putting 10 percent to 15 percent of your salary each year into a retirement savings account that's invested in stocks. If stock prices go from "overvalued" to "undervalued", you're essentially buying in at a discount -- and you have plenty of time to see your investments appreciate.

As for the housing market, some are predicting prices will sink 25 percent to 30 percent in the next few years. At best, prices could remain flat while they catch up with rents. (Before the bubble, the monthly costs to rent a home were roughly comparable with the monthly costs to carry a mortgage. These days, in New York City at least, the same apartment that rents for $2,500 may sell for $650,000 -- $3,800 a month after a 10 percent down payment.)
So my advice (which I'm following myself) to would-be homebuyers is to watch and wait and keep your eye out for a bargain. Make a lowball offer and, again, you'll leave plenty of room for appreciation.

The next few years are going to be a real economic education for us all. In my next column, I'll talk about the two cardinal rules for the cautious slowdown investor: hold down costs and diversify.

Oil Falls

Oil prices dropped Friday after rising more than $2 a barrel in the previous session as new U.S. trade deficit figures spurred hopes that the U.S. economy might escape a serious downturn.

The U.S. Commerce Department said Thursday the trade deficit fell in December and for 2007 as a whole -- an indication the U.S. is exporting more goods. This led investors to think U.S. energy demand would not be as weak as feared.

U.S. Federal Reserve Chairman Ben Bernanke's suggestion that the central bank is prepared to again cut interest rates also helped boost light, sweet crude to settle at $95.46 a barrel Thursday, an increase of $2.19 on the New York Mercantile Exchange.

That was its highest close since Jan. 9. The contract has risen in 4 of the past 5 sessions, adding more than $6 in a little over a week.

On Friday, the March contract lost 36 cents to $95.10 a barrel in Asian electronic trading by midafternoon in Singapore.

Bernanke said the Fed is ready to act again in response to deteriorating economic conditions. Interest rate cuts support oil prices because they tend to weaken the dollar. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.

Energy investors were also buying after a federal judge's decision Wednesday to confirm an earlier ruling freezing $300 million in a bank account owned by the Venezuelan state oil company.

Exxon Mobil is challenging Venezuela's nationalization of an oil project. A British court's earlier decision to temporarily freeze up to $12 billion in Venezuelan oil assets drew threats from President Hugo Chavez to cut off all oil sales to the U.S.

Weighing on oil prices were forecasts this week from the Energy Department and the International Energy Agency, an energy policy adviser to the industrialized world, that call for slower demand growth this year due to weakening economies.

Heating oil futures dropped 1.08 cents to $2.6558 a gallon while gasoline prices declined 0.83 cent to $2.4678 a gallon.

Natural gas futures lost 0.7 cents to $8.765 per 1,000 cubic feet.

Brent crude futures fell 38 cents to $94.78 a barrel on the ICE Futures exchange in London.

Stocks Rise After Buffett Offer of Aid to Bond Insurers Eases Some Credit Concerns

Wall Street finished mostly higher Tuesday after billionaire investor Warren Buffett offered to help out troubled bond insurers, easing some of the market's concerns about further deterioration in the credit markets. The Dow Jones industrials rose more than 130 points.

In an interview on CNBC, Buffett said his Berkshire Hathaway Inc. holding company has offered a second level of insurance on up to $800 billion in municipal bonds. The reinsurance offer is for bond insurers Ambac Financial Group Inc., MBIA Inc. and Financial Guaranty Insurance Co., known as FGIC.

Word of the offer gave some investors relief although Buffett said a deal would only back municipal bonds, and not the risky and complicated financial instruments that many see as more likely to have problems. Still, further assurances on the soundness of municipal bonds could help shore up Wall Street's confidence and reinforce the differences in quality among various levels of debt.

Russell Croft, portfolio manager at Croft Leominster Investment Management in Baltimore, said Buffett's move gives the market a bit of needed confidence.

"It's a good thing to see," he said. He also agreed with Buffett's assessment that stocks are mostly fairly valued. "We could definitely test some more lows going forward but there was a pretty good drop-off there again and I think people are trying to take advantage of it to get some quality stocks at cheaper prices."

The Dow rose 133.40, or 1.09 percent, to 12,373.41. The blue chip index was up more than 200 points earlier in the session. The Standard & Poor's 500 index advanced 9.73, or 0.73 percent, to 1,348.86.

However, the Nasdaq composite index edged down 0.02, or less than 0.01 percent, to 2,320.04.

Tech stocks fell in the last hour of trading amid uncertainty about Microsoft Corp.'s bid to acquire Yahoo Inc. -- an overture that could eventually go hostile. In addition, Research In Motion Ltd. fell after its Blackberry e-mail system had an outage.

Bond prices fell Tuesday after Buffett's announcement. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.67 percent from 3.63 percent late Monday.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell 81 cents to settle at $92.78 a barrel on the New York Mercantile Exchange.

Buffett's overture to the big bond insurers reassured investors. Buffett said one firm rejected his offer and he is still waiting to hear from the other two.

Bond insurers write policies that promise to cover payments to bondholders if the entity that issued the bonds defaults. Reinsurance provides a second level of insurance on those bonds.

My Opinion

Investors should be careful not to read too much into the market's advance recent readings on U.S. retail spending show that Americans are hurting financially.

"Stock markets will have good days in bear markets,"

Investors also appeared pleased Tuesday by a government plan called Project Lifeline involving the six largest mortgage lenders to help at-risk borrowers with all types of mortgages retain their homes.

And adding to investors' upbeat mood, Credit Suisse Group sharply reduced its estimate of how much exposure it has to subprime mortgage debt. Switzerland's second largest bank said its debt tied to subprime mortgages, those given to borrowers with poor credit, fell to 1.6 billion francs ($1.45 billion) from 3.9 billion francs at the end of September. Its fourth-quarter net profit fell 72 percent because of write-downs. The company's U.S.-traded shares rose $1.11 to $51.94.

General Motors Corp. fell 52 cents to $26.60 after announcing a fresh round of buyouts to all 74,000 of its U.S. hourly workers represented by the United Auto Workers. The company also reported losses of $38.7 billion in 2007, the largest annual loss for an automotive company.

Yahoo fell 30 cents to $29.57 after the search engine's board rejected Microsoft's $44.6 billion bid. That raised speculation that Microsoft -- whose shares rose 13 cents to $28.34 -- might take its offer directly to shareholders.

Meanwhile, Research In Motion shares fell $2.97, or 3.1 percent, to $91.50 after the company acknowledged that its network service was widely disrupted Monday.

Advancing issues outnumbered decliners by 3 to 2 on the New York Stock Exchange, where consolidated volume came to 3.92 billion shares from 3.51 billion.

The Russell 2000 index of smaller companies rose 5.73, or 0.82 percent, to 705.48.

Overseas, Japan's Nikkei stock average inched up 0.04 percent and Hong Kong's Hang Seng index advanced 1.35 percent. Britain's FTSE 100 rose 3.54 percent and Germany's DAX index rose 3.33 percent. France's CAC-40 closed up 3.37 percent.