Some Reluctant Market Commentary From a Simple Investor

After major stock market movements, sometimes I get asked to throw out my own commentary. Now, obviously I am not a market expert and CNBC doesn’t ever ring me up for interviews to argue with another talking head. There are also plenty of articles out there about why you should not panic and sell stocks. I can only offer what’s rattling around in my own head. A head that wears glasses from Costco and a haircut from Fantastic Sams. :)

Stocks provide ownership in companies, and by extension ownership of a piece of all future profits. Those profits can be either given back as dividends or reinvested in the company to try and make it even bigger (and ideally even bigger dividends eventually). Look at Microsoft, it’s finally paying a dividend after many years of share price growth. Apple, on the other hand, is still growing with no dividend. When things are uncertain, then you don’t know what those future profits are. This is why prices can vary so much. Any individual company most likely hasn’t gotten 10% worse since a week ago, but all those years and years of future profits might have been affected. People want more margin of safety now, and aren’t willing to pay as much as last week.

As someone still in the accumulation phase, I realize that I have no control over these day-to-day fluctuations. Some people look at stock charts like tea leaves and see patterns. I just tell myself that 20 years from now, the chances that the S&P 500 is still at 1200 is quite low. Actually, I focus on the overall ingenuity of the world these days, but I don’t have a handy reference number for them. So when stocks drop, I quietly keep on accumulating a larger and larger portion of these companies, which again is a larger and larger portion of all future profits. Focus on the fact that you are buying more shares, and not your actual balance down to the penny. To smooth out the ride, I keep 25% of my money in still-safe nominal and inflation-linked Treasury bonds. Ironically, after the credit downgrade, the value of US Treasuries actually went up. (See my target asset allocation & most recent portfolio update.)

If I was in the withdrawal phase of retirement, and trying to live off my portfolio, then hopefully I’d have only a much smaller portion of my portfolio in stocks. My risk tolerance would definitely be much lower. I would own more income-producing investments like dividend-paying stocks and bonds, and in this case focus on the income instead of the balance.

Comments

  1. I agree with your philosophy on investment. Normally I stay the course through these adjustments, but this time I sold last week, even after horrible losses.

    My reasoning: I’ve gone through several extended downturns including the 2000 dotcom bubble where I was a stock analyst and investor in San Francisco in the bubble stocks. And then again in 2009. I rode the wave down those two times and it was very hard to recover. Also, the downward spiral took much longer than a few weeks to complete. This time I am choosing to sit on the sidelines for a while in chance of getting back in at better prices. In other words, even though I think the market will be higher in 1-2 years, I’d rather make sure it doesn’t fall another 20% before it starts to go up.

  2. Thanks for being the soft voice of reason today. Yesterday’s massive plunge causes even the long view investors like myself to feel a twinge of panic.

  3. Too bad you didn’t package this advice and sell it! I’m sure you could have made some decent $ from this recent plunge into fear and greed. Thanks for being a voice for reason!

  4. While not a stock buyer, my 401k has me heavily invested in it nonetheless. And after business school and years working for one of the most profitable companies in the country I look on the stock market as something that clouds all responsible business decisions in the name of short-term goals. This goes for investors and company execs. Both want immediate payoff and that’s at any cost. It’s unfortunate but I see how companies will do anything to show a profit at the end of each quarter and stockholders simply don’t care. They want their piece, regardless of who it hurts.

  5. Problem with getting out of the market, is you also have to know when to get back in. It’s very hard to make both of those decisions correctly…

  6. I agree with the approach of accumulation of assets and taking a long-term view. But I agree with Chris above that there are times that it is good to take a large part of your money out of the stock Market. I would not do this on an impulse but only if objective long-term trend signals tell me that the Market is the coming months more likely to go down than up. It gives also peace of mind to use a system like that during the last few weeks.

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