The "stock market" can cause us all frustration. It can be your friend one year, and your mortal enemy the next. Lately, it seems like a game of chance, with no rhyme or reason to its ups and downs. The "stock market game" has seemed during the past 15 months to be greatly stacked against investors - lots of losing, and each glimmer of a gain gone in a fortnight or two. Perhaps that's about to change.
If you are investing for life, then you have to pay attention to the market and the indicators that tell you it may be safer now to invest than in the past. In short, the risk of losing more money in stocks may be lower than the reward. We call that the risk/reward ratio. By using indicators of the stock markets movements, we can chart the progress of the various market averages on a chart and then make some assumptions for the future. I won't get into all the ways that technical analysis is used to limit risk, but it's safe to say that a dose of this along with some common sense saves people from major disasters with their stock and bond portfolios. As a money manager, I show options and develop strategies outside of the human frailties of hope, feer and greed.
What to do now? Stock prices are currently up about 8% this month, and on a strong up-trend the past 8 sessions, rising about 16%. That's the biggest such rise since the mid-November bottom lasting about a month of a 24% rise. Notably, economic data has been good in some areas. Building permits rose 9% above the forecast, while housing starts were 30% above forecast. Related stocks, benchmarks of consumer spending are rising smartly; Home Depot, Lowe's, -they tacked on over 20% each in the past two weeks. UPS, Fedex, Harley Davidson are all adding points to their quotes. Could this signal the end to the recession; I doubt it. But could this be a signpost that the market perhaps will not go noticeably lower, and start to rebuild in 2009; I think so. Also, deal-making is starting to pick up; a few mergers were announced this past week.
Sure, there are plenty of trouble spots; GDP is declining, consumer spending is down, so is business investment; unemployment is up, 7.9% currently. Remember, through history, stock prices usually reach their lows in the middle of recessions, and since we don't know when recessions end, until months later, we can't gauge the time. Since the current recession started in Dec. 2007, and with a low of around Dow 6,600 earlier this month, that would equate to a 30 month recession, ending June 2010. But ... the stock market could be much higher by then, before the announcement of the recessions end. That's been the case through history. If you're a long term investor, with cash on the sidelines and out of stocks, you may wish to consider moving some money back into stocks. (I am assuming that you did not hold all your stocks or funds in this downturn, but if you did, you're brave and truly a long term investor who no doubt will prevail over time). Perhaps add 15-20%. I know it's hard to do emotionally. But usually if it hurts to act in investing, it's usually a worthwhile move.
Remember the dollar cost averaging method? Placing money into your retirement account in stages, not all at once. This smoothes out the prices (and gains and losses) you may experience along the way. Example, $10,000 invested at the end of August last year would we worth $5,800, a 42% loss by late Feb. The same $10,000 broken into 7 pieces of $1,428 invested on the last day of each month (Aug. thru Feb). would be worth $7,900, a 21% loss. Sure, they are both losses, but it's much easier to overcome the smaller loss. Also, don't neglect dividends. Using a broad index fund like the S&P500 in my example here, you are collecting 3.7% in dividends per year from the component stocks in the index, even if stock prices stay flat and go nowhere for awhile - that's near the current yield on the 30 year Treasury Bond. All or None are rarely good decision-making words, in life and in investing.
A client called last week and stated that she was tired of the poor performance of the stock market, and instructed me to avoid all stocks starting March 12th. She would be happier owning bonds and CD's, and forego any future gains in stocks. That's certainly a bold decision by her; and if you can sleep better at night, then it's apropos. I disagree with being 100% in bonds, for most all investors. She stated that she wouldn't lose money in bonds, which is false. Bonds can decline when interest rates rise, and rates are the lowest in a generation. Bonds can default and not pay your interest or principal back. After reviewing another account of bonds she held manged by another advisor, I noted losses of between 14% and 52% on specific bonds or bond mutual funds in her portfolio. One bond was issued by a municipality on the verge of bankruptcy! I guess she perhaps did not understand or have time to review her statements. I hope I can continue to help her with her portfolio and persuade her that a proper mix of stocks and bonds will serve her well. Being in her mid-70's, this is not the age to start to understand your investments or make money mistakes in your retirement years.
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I did promise a post on precious metal and collectible investing. Be patient, it's coming soon.
Chartered Retirement Planning Counselor