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Re: Young and Concerned, But Refusing to Sell
rayden
07-08-2008, 8:13 AM | Post #2536726
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Let me offer a dissenting voice to all who say "stay the course". The buy-and-hold advice is very misleading: consider that if you invested in (eg) an index fund in 1930, you'd have had to wait until 1954 to just break even; and similarly if you invested in 1965 you'd have had to wait until 1982 to break even. Even worse, many mutual funds that were around at the tops simply folded or became completely worthless, and many (most) companies that were around at the top went out of business or went bankrupt before the bear had run its course**. RCA, the flagship company of the roaring 20's, went from $112/share in 1929 to $3/share in 1932, and *never* recovered.
Saying that stocks "on average" go up 5% per year (or whatever number) is misleading; it is like saying that a river is "on average" 5ft deep. That may be true, but it still may not be a river you want to cross, because some points of it may be much deeper, and you can still easily drown in a 5ft avg river.
The name of the game in investing (and it is a game) is to figure out what game is playing, and play by those rules. Right now, the game is "bear market", and there are a lot of people still playing "bull market". It's kind of like a bunch of baseball players showing up at a football game, and getting clobbered by the offensive line.
My personal opinion is that we are in the *very early stages* of a bear market of monumental proportions. Picture the worst "possible" market you can imagine; now picture something much worse; now you've got it. You think a drop from S&P500 1550 to 1250 is bad? How about a drop to the 2002 lows of 800? (revisiting an old low is possible, right?) Now, picture (and please visualize it clearly - look at a long term S&P500 chart for this exercise) the market hitting that 800 level and falling right through, on its way lower... how much lower...? Now you've got it.
A number of problems are hitting at the same time: this is a key feature of bear markets (social not just financial). Real estate bubble bursting? Check. Bank solvency crisis? Check. Oil price spike? Check. Spike in almost every commodity out there starting with food? Yup. Trade deficit? Budget deficit? Yup. Entitlements crisis? Yup. Demographic crisis? Yup. Middle East political/military crisis? You bet. Runaway money supply? Yup. Overall, this is worse than anything in the past 50, and possibly past 100, years. I think it will take *at least* a decade to work through; abandon any hope of a quick fix and rebound, and avoid being suckered in by the fool's rallies along the way.
What to do? If you are an agressive speculator, this is the opportunity of a lifetime. If you're not, your top priority should be capital preservation (I would say survival, but that would be a little alarmist). I wouldn't worry about returns, and I certainly wouldn't be in the broad market on the long side, either in stocks (credit crunch, dropping profitability, NO bottom), or in bonds (credit crunch, default risk, rising risk premiums). I would worry about currency risk (how do you defend against a drop in the US$?), inflation (commodity shortage driven), country risk, and counterparty risk (if the bank that runs your mutual fund fails, what exactly do you get? what about your brokerage?)
In practical terms, this translates to a recommendation for some physical gold/silver (coins in safety deposit box), some currencies (FXE/FXF/FXA, or cash in hand), some very defensive mutual funds (MERKX/VIPSX), some commodity hedges (USO/GSC/DBC), and some bank CDs, in whatever proportions you like. This is not exciting, and it won't make you rich, but it gives you peace of mind, and in a few years you'll be really, really glad you did this. If you're not prepared to be a big bad bear, sit this one out.
P.S. I'm up 159% ytd in the handson contest, I must be doing something right? or just lucky. YMMV.
Topics
bull market
capital preservation
Middle East
oil prices
risk premium
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