Rocky start to 2008 probably a "normal" correction
The stock market is off to a rather dreary start to 2008, with the popular market averages falling 5% to 10% in just a few weeks, and 14% to 20% from the highs of last October. You can blame it on any of the popular reasons you will hear about in the papers or news channels, or just accept the fact that prices are ruled by humans and their emotions of greed and fear. Also, stock prices over long periods tend to rise in 3 of every 4 years. We may not be in a recession yet, but we are in a bear market for stocks now. How you handle the risks will determine if you have to stomach to be a successful investor.
The average of the 10 worst bear markets since 1901 lasted about 20 months, and caused about a 40% decline in stock prices. That may seem like a long time, but some were shorter: 2 @ 13 months; some longer (the Great Depression) @ 31 months, and the recent 2000-2002 bear market that lasted 33 months. So from a historical standpoint, we are about half-way through the pain at this point in price terms if this is a "top 10" event.
What are your options at this point? One option is to sell your lagging (losing) stocks, and deploy that money into better prospects. Another is to sell and to park the money is cash. If you are a long-term investor and chose this option, then you need another decision to buy again...and that is a difficult assignment. No one rings a bell when it's time to buy again. A third way is to keep most of your stocks and hedge your risk using mutual funds or ETF's that move opposite the direction of stock prices. I won't get into the details, but check the following symbols on your charts: The ETF's are: SH, SDS, DOG, DXD, RWM,TWM, PSQ. In mutual funds, try the no-load Pro Funds: UCPIX and USPIX. These investments trade like regular stocks or mutual funds, and they hold securities sold "short". Today, the above mentioned gained between 1.5% and 5.5%. So therefore, their gains would offset a portion of your loses day by day.
Political Implications for Stocks
I don't want to mix political musings in this column, but wanted to share this verbiage from David Kotok of Cumberland Advisors in his year-end report in this election year. To quote, "we acknowledge that stock markets like clearer outcomes during election years. Uncertainty breeds volatility. Ned Davis database starting in 1888 shows Election year gains averaging 14% when the incumbent party wins and 18% if that incumbent party is Republican. When incumbent Republicans have lost, the average Election year gain is under 2%. Since WW2, there have been three Republican Party turnovers. Kennedy’s election year of 1960 had a 3% declining stock market. Carter’s 1976 victory over a post-Nixon disgraced Republican Party was celebrated by a booming 19% up market. Bill Clinton’s 1992 win over incumbent Daddy Bush saw a 5% upward market move."
For a review of your portfolio, give me a call.