Know when to hold, know when to fold
In what seemed to be a stock market freefall back in March, some people panicked and did exactly what you’re not supposed to do: sell low, at what now appears to have possibly been the bottom of the market drop. They sustained huge losses, of course, but thought they were buying peace of mind—they couldn’t take the bear market heat, so they got out of the bear market kitchen.
Some of them don’t regret it. But many are kicking themselves, since the Dow has rallied 26% since then. But instead of self-flagellation, they should remind themselves that the lows in March are still only the lows so far, and that the rally of the last month or so is reversible.
That’s true of any rally (and any drop), of course; it’s the nature of the market that all trends are temporary, and those who don’t realize that, and who counted on the continuation of the seemingly never-ending bull market of recent years, were fooling themselves. If they lack the stomach to ride the inherent instability of the stock market, they need to get out.
As for me—well, as I’ve written before, I’m inherently risk-averse about investing. And yet, in a post-divorce situation, relying on the counsel of a so-called expert, I found myself buying at a level that turned out in retrospect to have been high. Then, when the crash happened, my instincts were with the people I’ve just described: to bail at the low point. But it’s an urge I’ve managed to resist so far, and thus (at least on paper) I’ve recouped some some of the money I would have lost if I’d succumbed in March and gotten out.
If I had it to do over again I’d have followed my gut and taken on less risk in the first place. But I don’t have it to do over again, and so I’ve decided to hold on for now, far more aware of inherent risks that I always knew were there anyway. I’ve tried to cultivate a philosophical attitude: when I find myself looking back and starting to tell myself some version of “oh, if only I’d (fill in the blank) back in (fill in the blank), then I’d have (fill in the blank) more money than I do now,” I block that thought as best I can.
And yet I understand—boy, do I ever understand!—those who bailed and are kicking themselves right now. Of course, in a little while, they may have the last laugh.
Neo,
Investing during unstable times is never for the faint of heart. We are all haunted by the “would have, should have could haves”. Looking back is basically unhealthy, the question should always be; what should we do now?
Objectively assessing of our present economic situation, the next haircut, or beheading, will be taking place in the bond markets. Avoiding long-term bonds and CDs is probably smart. Equities will not be fairing that well either. The unprecedented rapid expansion of the money supply by the FOMC, and runaway government spending is almost a sure recipe to destroy the value of our currency, thereby effecting everyone whether they are risk-adverse, or not. The old saw “inflation is truly the cruelest tax of all” is too true. Cash will be trash, and commodities will be king. Real estate will trend upward once the oversupply diminishes over time.
Good luck to you, we will all need some.
What goes up will come down, what comes down will go up. Sir John Templeton’s experience is instructive.
What little remains of my once comfortable nest egg resides in accounts in a savings and loan. I add to it every pay day, and it’s not doing much better than if I were stuffing pillow cases with it. I left all banking institutions and moved over to this particular savings and loan known for being conservative about things.
I am not a financial wizard by any stretch of the imagination. I simply have no idea what to do but sit tight where I am. Admittedly, I am deeply concerned.
There are too many people who know what I should do, for a fee.
I can’t help but feel the worst is yet to rear its ugly head.
Looking back, I’ll take the Red Sox to win the American League Pennant in 1967 at 100-1, Detroit at 30-1 in 1968, and the Mets at 100-1 in 1969. Then I’ll put all that into Wal-Mart stock and go fishing.
Life is so easy in retrospect, isn’t it?
at this point, I am saving for land. I own one acre in the next county over, but am saving/looking for land in my county to pay cash for-like I did the other acre. You can grow food on land.
Right now I am sucking up my pride and staying with my older parents while I save- and am working on their farm after work and on weekends- learning the trade if you will.
I’m one of those who bailed out of the stock market in March. I had lost about 50% of my holdings and the market seemed to be in a death spiral at the time.
Yes, I’m kicking myself for not holding out for a couple months longer. I missed the recent rally altogether. But I’m not sorry to be out of the market now. I’m waiting for the other shoe to drop. I have some cash at home and some in the bank, and I’m thinking about taking it out of the bank.
I recently discovered the website The Market Ticker. It’s definitely worth reading. Click on the comment link at the bottom of each ticker, and it will take you to the Forums page. It is a huge site, and a lot is going on over there.
I’d just like to add that if I had started reading The Market Ticker a year ago I would have gotten out of the market largely intact.
It is better to be too early than too late.
Oh, and br549 is right: The worst is yet to come.
We should all be regarding the stock market as a gambling casino right now. And the first rule of gambling is don’t risk more than you can afford to lose.
This is a timely post. I would like to know….if someone (because of their timid approach to investing in general and specific fear of the upcoming inflation/stagflation) had cash on hand….what would you do?
I think the people posting on this site are very savvy and I value your response.
Plus, if you sell low and move to ‘safe’ banks and bonds you can get finished off by Obama’s hyperinflation!
At least thats one good think about stocks, they trend up along with inflation…
I don’t consider savings banks any safer than other investments – FDIC insurance will mean nothing if the government decides to inflate its way out of its mounting debts.
Fundamentals work – don’t live on credit, don’t buy more house than you can afford, save every month.
The stock market also works.
Short-term speculation is for investment pros – and even they don’t do very well at “beating the market”.
Anyone who does something else for a living should invest in stocks FOR THE LONG TERM, using something like an index fund. This automatically gives you a balanced portfolio, with low/no brokerage fees, and the long-term focus gets you over the inevitable ups and downs.
But you MUST leave your money invested, even during the downturns. People who steadily invest small sums in something like an index fund will, over decades, make money.
Google “compound interest” and “dollar cost averaging” to understand why: over time, more and more of your account is reinvested interest and dividends rather than new money that you had to work for – that is, money making money.
People who are coming to retirement age now may have to put off their plans to leave work another 5-10
years before they start – but if they’ve been investing over decades, they will still come out ahead in the long term as their investment fund’s holdings regain their value.
Heh… just published somewhere is a study showing the best and also least risky investment in the last 40 years was Treasuries, not equities. Didn’t read the study, but I’m sure that buying T-bonds during the high inflation, high yield (double digits!) Carter era had a lot to do with that.
Treasuries are a bubble now, with everyone chasing safety to very low yields, given the coming inflation. Must I state that bond prices move inversely to yields?
What many fail to understand is that volatility is a good thing for investors. That’s how the money is made. When your investments are worth more than you investested in them, take your profits. Leave it in cash and buy back in on the next dip.
That’s not timing the market, it’s just the best way of increasing your net worth.
I am thinking that Federal Government may move to federalize some state debts, especially from California and perhaps New York. What interesting about that is that interest on such bonds will go from being tax-exempt to taxable! Triple win for the administration: more control over local policy, more federal tax revenue, increased public sector spending for core Democratic constituencies. The alternative is to watch a rise in municipal bond yields, which will simultaneously destroy the wealth of existing investors, increase borrowing costs for states, and encourage investors in new issues seeking higher tax-exempt yields. This strikes me as an implication of the California fiscal breakdown.
JThoits Says:
May 21st, 2009 at 10:58 pm
“This is a timely post. I would like to know….if someone (because of their timid approach to investing in general and specific fear of the upcoming inflation/stagflation) had cash on hand….what would you do?”
I would go to http://www.apmex.com and buy gold Canadian Maple Leafs (or any of the other 24 carat coins or bars) with 10-20% of that cash.
In case you haven’t noticed, gold has been in a bull market since 2000 (go to stockcharts and pull up a chart for ‘$gold’). I consider gold in hand just like any other insurance – you buy it hoping nothing bad happens, but if it does, you’ll be happy you did.
Mel:
Thanks! I will check it out.
Hopefully, you won’t need a new age alchemist. One who can turn gold into lead.
Ten years ago I’d have let loose a couple hearty guffaws over a statement such as that. Today, I mean it.