NEW YORK — The stock market is swinging wildly and the economy is barely registering a pulse. And that presents some opportunities for consumers.
Given the drop in stock prices over the past two weeks, for example, bargain hunters should consider making their portfolios more aggressive. Parents may think it’s a good time to start a 529 college savings plan for the same reason.
Meanwhile, interest rates on mortgages and car loans are near record lows.
They’re admittedly small comforts at a time when nest eggs are shrinking and anxiety about job security is high. But seizing such opportunities will be increasingly vital as household budgets continue to feel the pinch. The government now says that growth in the first half of the year was far slower than previously believed, and the rest of year isn’t expected to be much better.
For anyone who still has some financial flexibility, here are five moves worth considering:
Strengthen retirement savings
Even if it feels a bit uncomfortable, the best time to buy stocks is when prices are low. And the stock market remains down by several measures; the Dow Jones industrial average is down 7.4 percent this year, the Standard & Poor’s 500 index is down 10.9 percent and the Nasdaq is down 10.2 percent.
Some stock prices are low for good reason. But even companies with strong earnings got swept up in the sell-off this week. So if you already own shares of a company you believe in, buying more at a lower price would reduce your average cost per share.
Another option is simply to reallocate how the assets in your 401(k) are invested. If you typically have 60 percent of your portfolio in stocks, for example, you might feel it’s worth pushing that figure up to 65 percent. That means more of your money will be positioned to grow when the stock market rebounds.
With target-date 401(k) plans, however, be careful about simply switching gears between the pre-set “conservative,” “moderate” and “aggressive” options. It could mean you’re shifting the stock or bond allocations by as much as 50 percent, which is probably a more dramatic change than you want, notes Glen Buco, a certified financial planner with West Financial Services in McLean, Va.
Another investment option with rising significance in this political climate is the Roth individual retirement account. Unlike with 401(k) plans, investors pay taxes on contributions rather than on their withdrawals. It’s a difference worth noting as lawmakers look for ways to reduce the deficit dramatically. Despite fierce political opposition, some experts believe higher taxes are inevitable.
At the very least, being able to withdraw tax-free money from a Roth IRA could be a smart way to diversify retirement income, notes Christine Benz, personal finance director with fund tracker Morningstar. That’s because Roth IRAs can help keep you in a lower tax bracket since you already paid taxes on contributions.
Snap up dividends
The recent drop in stock prices also means some quality dividend paying stocks are selling with even greater yields.
A dividend yield is the amount of the dividend paid divided by the share price. For example, if a company’s annual dividend is $1.50 and the stock trades at $25, the dividend yield is 6 percent. If that stock price falls to $20, the yield rises to 7.5 percent.
The average yield on S&P 500 companies that pay dividends is 3.17 percent this week, according to Howard Silverblatt, an analyst with Standard & Poor’s. That’s up from 2.4 percent just two weeks ago.
By comparison, the yield on the 10-year Treasury briefly touched a record low of 2.03 percent on Tuesday before heading higher.
It’s true that dividends aren’t guaranteed — companies can decide to slash or even suspend them. But this is only done in dire circumstances because it signals serious financial distress and scares off investors. So far this year, only two companies have cut dividends.
Capitalize on low mortgage rates
Mortgage rates are poised to go even lower. Any homeowners who felt that the opportunity to refinance was slipping away will likely have more time.
The average rate on a 15-year mortgage, a popular refinancing option, fell to 3.54 percent last week. That’s the lowest level since Freddie Mac began tracking the rate in 1991.
A few percentage points may not seem like a lot. But the difference in the monthly payment on a 4 percent loan and a 6 percent loan is more than $150 a month. That’s assuming you’re borrowing $150,000 over 15 years.
If you’re not sure whether refinancing will make financial sense, the rule of thumb is that the new rate should be at least 1.5 percent lower than your current rate. Otherwise, closing costs can eat into savings, notes Mike Anderson, a board member of the National Association of Mortgage Brokers.
Anyone looking to become a first-time homebuyer may want to take advantage of the low rates as well. It’s not clear how much longer financing will stay so cheap, but mortgage rates track the yield on the 10-year Treasury note. When the economy weakens, yields tend to fall as investors shift money from stocks to bonds, which are seen as safer bets.
There were fears that Standard & Poor’s downgrading of the country’s debt rating would cause yields to rise. But investors are still putting money into Treasurys despite S&P’s actions.
Watch for new car incentives
The conditions for buying a new car are ripe. To start, the sluggish economy has resulted in drivers holding onto their cars longer. That pushed up the prices dealers are willing to pay for used cars in the last few years. On average, dealers are paying around 10 percent more for three-year-old used cars than they were last year, according to the National Automobile Dealers Association.
Meanwhile, sales of new cars have slowed in recent months. Some experts think automakers will soon resort to big discounts to get shoppers into showrooms.
That hasn’t happened on a broad scale yet, but shoppers are likely to see at least a few big incentives starting this fall.
Japanese car makers slammed by the earthquake and tsunami are just now getting back up to full production. Once cars start arriving in showrooms in the fall, they’ll need to offer attractive incentives to get buyers back into showrooms, notes Aaron Bragman, a senior analyst with IHS Automotive. That could potentially prompt other car makers to offer incentives as well.
The rates on car loans are extremely low as well, notes Greg McBride, a senior analyst with Bankrate.com. That’s because car loans are typically tied to the yields on 3- or 5-year Treasury notes.
Ramp up college savings
The stock market slide also means it might be a good time to open a 529 plan, which enables families to sock away tax-free savings in an investment portfolio to pay for college. Those who already have a plan should keep in mind that there are no annual caps on contributions. The maximum lifetime contributions vary depending on the plan, but are often as high as $300,000, notes Joe Hurley, who runs SavingForCollege.com, which ranks 529 plans.
Mapping out a strategy to pay for college is becoming more of an imperative. As part of the deal to raise the country’s debt ceiling, lawmakers cut subsidized loans to graduate and professional students. Federal student aid, including Pell Grants for the neediest students, could see further cuts as lawmakers look to reduce the deficit by another $1.5 trillion.
In terms of how you invest the funds in your 529 account, be careful about how aggressively you invest in stocks. The time horizon is relatively short, so there’s not as much time to recover if the markets continue to take a beating.