Current Market Conditions: My Thoughts… And Yours?

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A couple of people asked my opinions on all this financial market turbulence. I really don’t have that many coherent thoughts these days, but if you really want to know, here is a sample of what has been going through my head:

  • People need to stop refreshing and staring at those ticker symbols. Watching doesn’t change anything. It’ll just give you indigestion. If not, can I have your spicy ahi bowl?
  • For some reason, I am not worried. I am actually a bit excited. But if I was close to retirement and more than 60% stocks in my portfolio, I would definitely have fear. I understand my parents’ fear.
  • Check out this Vanguard article on the benefits of diversification.
  • Negative sentiment and recessions are part of investing. If you are young, it would be a bit naive to think that you would never see a recession in your investing experience. Perhaps you used to wonder how you would handle a real stock market drop. Well, how are you taking it so far?
  • Simple and easy are not the same thing. Buy-and-hold is a simple investing strategy. But it is not easy. Right now, cash looks pretty good to a lot of people. Can you stick it out?
  • People should vote.
  • “Why not just sell and wait things out for a while? This isn’t the bottom!” Sure, this may not be the market bottom. But chances are you’ll miss the bottom. If you try and catch the market on the way up, you’ll probably miss most of the rise before you jump back on the bandwagon.
  • A lot of behavioral finance research has shown that humans are pretty stupid when predicting trends. If we see things go up for even a little while, our natural instinct is to predict that next it will go up again. If things go down twice in a row, then we predict the third time it will go down… and down… and down… oops! It went back up!
  • As of today, I personally do think things can and probably will get worse. But again, I also don’t know when the bottom will hit. So I will be making regular buys all the way down.
  • If you haven’t already, try this charting game I pointed out before. It helped to convince me that I am especially bad at market timing. 😀
  • For the individual stock investors, I hope that you continue to track your performance (including cash balances). I am content being guaranteed to be slightly above average due to having very low investment expenses through index funds.
  • The real yield on individual inflation-protected bonds (TIPS) is pretty high right now, around 2.5%. I might buy some, as the real yield and maturity combination seems a lot better than what is available in VIPSX. But I need to do more research.

Okay, that’s me. So what do you think?

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  1. I’m also excited. I think that this may be one of the best things to happen for me in the markets right now considering where I’m at with retirement (I’m 30 right now). There is so much overreacting going on that things will soon be at a very nice discount and I’ve got some extra money ready to go in when the time is right.

    A great resource right now for understanding a lot of what’s going on is NPR’s Planet Money and Vinny Catalino’s Blog. I’m currently watching the credit market to see when it eases up some. I think that will be the best predictor of when the market will get out of it’s current slump. But I will probably be making regular buys too, since I am also bad (like everyone else) at predicting the market.

  2. In all honesty, this market has been a few years in the making. The over inflated housing market caused by greedy lendors and ill-informed borrowers ballooned the market to unrealistic highs. Now we are pulling back and value buys are starting to reveal themselves. Also, look at Buffett. He is buying up large shares of companies right now.
    If someone is close to retirement, this will hit them hard if they were not properly diversified. If you are 20 or more years from retirement, this is an opportunity.

  3. Good list! I recently completed a 10-part series on my site where I took readers through my short-term plan for this market mess. I think for each investor it will always be different, but these are times when you return to fundamentals instead of trying to do something fancy.

  4. With true capitalism, it’s natural to see peaks and valleys, and that’s often a good thing since it spurs more innovation and new streams of revenue. Unfortunately, the Fed kept lowering the interest rates to keep the party going. I would like to see interest rates rise and the construction of new homes drastically reduced.

    In my past career, I was a daytrader of commodities (corn, soybeans) for a large food producer. Even following fundamentals, it was impossible to predict the highs and lows since markets have so much irrational behavior (and who knew how much hedge funds would change everything!). I always used a step approach to buying and selling over a period of time when fundamentals would tell you where the market is headed. This approach never made the largest returns, but it worked well in the long run. I do the same with stock futures, but it’s much more overwhelming because of the diversity and size of the markets. I do think now is a great time to buy. If oil prices stay low, many companies will start making better returns.

  5. I think this entire situation is very scary, and I do think it will get worse. Honestly, I am pretty jealous of a friend of mine who sold everything in January. However, I still believe that in 20 years the global economy will be bigger, and that’s why I left things alone in January and why I continue to stay in now.

    My strategy is simple: only risk what I don’t need for the next 10-20 years, buy & hold, diversify, stick to low-cost index funds, and round things out with a few Berkshire B shares (thanks to Buffet for being the only decent spot in my portfolio these days).

  6. One benefit of this market drop is that it can be a good time to change mutual funds that are outside of retirement accounts. When the market is high, changing funds (in taxable accounts) will trigger capital gains tax. But now selling a fund may even cut your taxes.

  7. I’m young like you. As such, I’ll be a net buyer of stocks for many years to come. I welcome down markets!

  8. Yes, people should vote but for who? Both major party candidates supported the bailout fiasco and both are still promising free houses or free health care despite the federal government being on the verge of bankruptcy.

  9. I have to agree with Stacy.

    I’ll be buying all the way to the bottom and smiling all the way back up. The majority of my holdings are all ‘on sale’ … what an opportunity!

    Luckily, I do have the asset of time. I feel for those who are closing in on retirement dates.

  10. The four pillars of investing says that young investors should get on their hands and knees and pray for a crash. I’m glad that it happened so soon after entering the workforce. I think that it’s a healthy correction, especially since I’m renting and want to own a home in my lifetime.

  11. I’m young so I’m mostly embracing the drops, although it must be a bit stressful because I’ve been clenching my teeth a lot lately. I’m sort of in the “pull the band-aid off quick” group with respect to this whole mess. I admit to some selfishness here; if the drop is precipitous but we start getting our act together I’ll come out much better in the long run than if we have a decade of stagnation.

  12. I think your comment about humans being stupid is a little harsh. Humans are actually pretty smart collectively and if there WERE a true pattern that was reliable in the stock market you can be sure people would pick up on it pretty fast.

    But there is no pattern. None whatsoever. And perhaps the only bad decision people make is convincing themselves that there is one and then betting on it. But that’s a different story.

    Also I want to add “Safety in numbers” to your talking points. This is how investors have thought for the last decade and investment banks too. We see everyone else around us behaving a certain way like buying bad mortgages and not concerning themselves with potential fallout and we act the same way.

    And you know what? It actually worked. To a certain degree. So many big players were involved that the government and the American people couldn’t let them all fail at once despite their own mistakes, hence the bailout. Safety in numbers (or peer pressure in some cases) is a very primal instinct and leads to a lot of behavioral decisions.

  13. Isn’t this the best time for rebalancing your portfolio? Stocks are pretty attractive now but you need cash to buy them … so sell some bonds take some of your existing cash and go ahead and buy the S&P 500 index.
    This will comfort you as you feel in control.

    I know this is not a new idea but I really like it

  14. The Frugal Immigrant says

    Back to Vern – “True Capitalism?!?!?!????” Why do you people still think that there IS such a thing as Free Market and True Capitalism in the real world???
    These terms were coined as THEORY and ideologies – same as comunism and people’s “ownership” 100+ years ago.
    NONE of them has ever worked in its pure form and none of them will EVER work in the long run.
    Having lived my first 20 years in an ex-socialist country I can speak from personal experience.
    The world is changing. THINK with these heads that you were given, instead of blindly following a theory be it one or another.
    Sorry for the rant – but I think the “free market day” official holiday 😉 sums it all up (google it up)

  15. I felt better when I logged into my Vanguard IRA account, and saw the shares that I own is going up as the price is going down through automatic investment. However, I almost refuse to look at my Fidelity 401K account even though it is doing the same thing – because it only shows me how much my balance is (which of course is depressing).

  16. I don’t have much invested, but I also don’t plan on cashing out my retirement for more than 30 years. So now looks like a good time to keep buying. I can only imagine what I would have now if I was able to invest $1000 in the late 80’s when I was only 5 years old. 😛

  17. I am in no hurry to buy stocks: I think stocks will remain cheap for a couple of months. If you can swing it I would recommend buying a rental property in a good location (e.g. college town). The thinking basically is with inflation being about 5% and the interest being 5.5% you are just paying .5% in real interest and that can become negative if the Fed keeps doing what they are doing.

    If you can’t swing it start saving — there are some good yields out there and in those times people recommend to have about 5 months of expenses at hand…

  18. My cash reserves are much higher than normal right now, but its simply because I feel like I can get a better deal by waiting and buying in later. I am buying in with about half the weekly cash I normally would, the rest I will hold and start buying when some confidence returns (perhaps after the election… maybe once home prices stabilize). I may miss bottom, but I think I can get closer than we are today.

    Regarding the candidates – I love how they both talk about the greed that got us into this mess (wall street and home prices) and yet say the middle class is the victim. From my angle, most middle class people live on credit, have a boat and house they cant afford, and are a big part of the reason for this mess. The middle class isnt an innocent bystander here.

  19. “Sure, this may not be the market bottom. But chances are you’ll miss the bottom. If you try and catch the market on the way up, you’ll probably miss most of the rise before you jump back on the bandwagon.

    Bravo, Jonathan. This is so true. And it does take guts to see the losses. Don’t look if you can’t stomach it. Why look? I know it is down. I don’t care by how much. And yes, automatic reinvestment of dividends buys me more shares at lower prices every month.

    Personally, I think stock market is not the best way to invest for retirement, even index funds. I think investing in businesses is better. But it takes more work. And yes, you can invest your IRA and 401(k) money in businesses. It is on my “To Do” list for this year to figure it out for myself.

  20. TIPS do look good, but they are very problematic in taxable accounts because of the unfortunate tax treatment. 2.5% real is quite good, so I would use up a significant chunk of tax-advantaged bond holdings in TIPS if it’s convenient.

  21. Did anyone catch Jim Cramer on the Colbert Report last night? He didn’t exactly give a ringing endoresment to the long-term prospects of the stock market. And remember, this is the guy who actually predicted back in August 2007
    [in a now famous rant on CNBC], of the impending financial armageddon.

    My question is, when one of the greatest investors of this generation is gloomy about the stock market, why should we not take the money out, until he eventually calls a bottom.

  22. Retirement account in general have lost a total of $2 trillion. Search in Google and find out.

    The financial down trend makes me feel a little sad. It makes wonder what I do with the money if market were not down.

    Anyhow, I don’t know what to do. So I just continue to hold. And I am still young. I hope everything will be alright.

  23. The responses here would be more interesting if the median age was 55. However, since the majority of your readers are in their 20s and 30s, we’re bound to see these responses.

    @John – What’s the point of that? Why not just wait 5 years? Buy, hold, rebalance, buy, hold, rebalance. Selling and “timing” only makes things confusing and does little to increase your long term rate of return.

  24. John! Google Jim Cramer before you call him “the greatest investor of this generation”

    “less than a week after Cramer apologized for recommending viewers buy Wachovia stock — he was great pals with the company’s CEO, Robert Steel — right before the stock price tumbled from about $10 a share to just under $2. Cramer offered a similar “explanation” for his mistake judging investment bank Bear Sterns, telling viewers in March “Bear Stearns is fine” just before the company collapsed over a weekend and sold itself for $2 per share.

    and “CNBC banished reporters from Barron’s from its air after they proved Cramer’s stock picks did worse than the general market”

    I guess, you are young, John. I am old enough to know: Predicting Market Moves is a Bad Investing Strategy! Watching Financial TV is worse than that!

  25. Jonathan wrote:

    “Why not just sell and wait things out for a while? This isn’t the bottom!” Sure, this may not be the market bottom. But chances are you’ll miss the bottom. If you try and catch the market on the way up, you’ll probably miss most of the rise before you jump back on the bandwagon.

    Mathematically as long as you jump back on the bandwagon at a lower level than where you sold, you are better off. Missing the bottom and missing some rise from the bottom is not a problem. Whether you are able to get back in at a lower level is the question.

  26. I wonder what the long term impact of not having growth for 10++ years has one’s portfolio in general? I mean, I’m almost dead even with my actual contributions at this point from 10 years ago. No gains. And probably others are in a similar boat. On long term finances, though, is it much worse if your first 10 years are a wash, or your last 10? Or the ones in between? There must be some way to calculate which is the worst. I’m afraid the first 10 probably count more than the others, which is scary to me.

  27. As a young person with quite a lot of capital invested in index funds, I have seen my investments drop close to 15 percent in the last 2 months. While logging on and seeing this drop is a bit shocking I have faith that the market WILL rebound (even if it takes a few years). As such, given my time horizon, i’m looking to scoop up even more shares. I’m a bit excited by the market gloom and I’m secretly hoping it gets worse. History is rife with market recessions and I don’t see any reason to assume that this is the nail in the financial coffin for all time. There is a lot of nonsense flying around in the media, and while it may well get worse, lets get real – this isn’t a second Great Depression. If you have a solid asset allocation plan, and you have a time horizon of 5 years or more…what’s the big deal?

  28. You wanted to know what we are thinking… Well my thought is ‘Do you really want to LOCK IN your paper losses?’

  29. mimi: just made a spread sheet to check this out (I was curious too)

    assuming 5% per year, 25 years investing, 5k contributed per year:

    first 10 years at 0%: $206,839.23
    last 10 years at 0%: $158,287.46

    So it looks like you want the first 10, rather than the last 10.

  30. Mimi: The only way that the first 10 years being a wash would be the worst for your overall picture is if you put in a fixed ammount and never added to it again.

    If you continue to buy in to the market, a downturn in the first 10 years can be a good thing as you are getting stocks for cheap. Also, most people are able to contribute more to their retirement later in life when they make more money and posssibly have their mortgage paid off.

    It is always worse to have a downturn in the last ten years of the ‘big-picture”, and hopefully by then you are not involved in risky investments.

  31. I’m not 55, but I am planning to retire in 6 years (and 3 months and 1 week), so my view may be comparable to that of those who are.

    I’m also holding. I know sometimes the market is down for a very long time (see how long it took to get back to 1929 levels, for example) and thus I might be doing the wrong thing, but I’m still hoping it’s good. All my 403b and IRA money is in (low-fee) stock funds but that’s because I also have a pension. My house will be paid off in five years. And my savings for other things besides retirement (i.e., shorter-term goals) are all in savings accounts, savings bonds, and CDs.

    I’m investing more each month now than ever before, so it’s a good time to be getting low prices.

    Also, I won’t actually be “cashing out” in six years. I’ll just be beginning to make withdrawals. I plan to withdraw 4% of the total each year, putting any extra into savings in the good years to withdraw if I want to in the lean years. So, it doesn’t just matter to me what the market will be like in 6 years; it may also matter what it’s like in 30 years or even 50 years.

    I admit, it still feels scary. But I make a graph showing what my investments would be if I were earning 8% or 11% and plot my actual amount on there. The actual amount has been going above and below those lines over the past 15 years, mostly above (until now). I sort of think of those lines as being my “real” savings and my actual amount as being my “paper” savings. I started that thinking when the stock market was bubbling (because you can’t count on that “extra” money to hang around), so perhaps that sort of thinking is still valid now.

    One other thought: the dividend yields on plummeting dividend-paying stocks sure look pretty if you buy them now (not if you already bought them before).

  32. I started reading this blog last year. I first got my money out of low-rate CDs at my bank into higher rate online banks. Then I figured out index funds and moved most of my money there. That wasn’t a good idea. I think I’ve lost about 30% of my savings now. I’m still buying stocks steadily, but it seems futile since it will take me a very long time to even catch up with what I have lost. Meanwhile the people who caused this crisis are being paid millions or hundreds of millions, and additional thousands of dollars of my taxes are going to help them out further.

    Japan’s Nikkei index is now at the same level it was in 1984. Will the S&P500 still be at 10,000 twenty-five years from now?

  33. I’m not a big fan of Jim Cramer – well, actually I am, but only as a showman, not for financial advise – but I found it odd and somewhat amusing that he’s been given so much grief this past week for saying, if you need the money in the next 5 years, take it out of the stock market now. Geez, that’s good advice ANY time, not just now.


  34. The thing that makes me feel uneasy is that while everybody else is telling us to stay in the market and wait it out, Cramer has gone against the conventional wisdom and told us to Sell Everything.
    Not only that, but he is recognized as always being a long-term Bull. His comments on the Colbert Report didn’t soothe our fears either.

    I don’t know why, but something makes me feel he may know something the rest of us don’t.

  35. Cramer is an idiot. You’d be better off doing exactly the opposite of what he said. This same advice is probably true on a broader scale. When you see the general public exuberently pumping money into the market, it’s probably a good time to pull out. When you see the public pulling out (i.e. now), it’s probably a good sign to get in.

    Doesn’t anyone believe in the efficient market hypothesis these days? All of the above talk in the comments of trying to time the market indicate that we have some disbelievers in efficient markets.

  36. Dow is heading to 8000. I found that the buy-and-hold theory is a scam after all. The asset managers and financial advisors want to keep their AUM (asset under managerment) at any cost. Of course they want you to keep your money in the market. When the market is bad, GET OUT!

  37. I lost nearly my entire account b/c of this. Here’s some pointers:
    -Don’t average down (unless you got loads of cash)
    -Don’t use margin
    -Use stops
    -Did I mention not to use margin?

    I’ve never experience this type of meltdown and was completely unprepared for it. I’m in my 20’s so i’m not that worried, but it was tough seeing your savings go down the tubes.

  38. Since we’re talking about financial TV, I was watching a financial round-table on PBS about 6 months ago. The host asked, “Where would you advise that people invest right now?” And the assembled experts each said things like, “diversified index funds” or “commodities” or whatever. Then they got to this hot-blooded old man who declares, “CASH! Put it all in CASH!” And you got the distinct impression he was a bit of an oddball. Then 6 months later you realize he got his call right on the money. I wish I could remember who that guy was. Does anyone else remember/know?

  39. Justjoeguy says

    The stock market is really a casino. In other words if you put your money in the stock market you are really gambling. But if you go into a casino you can find out what the odds against you are quite easily. Just ask. They will tell you. It’s no secret. In the stock market you don’t know because the people who run it don’t know. They don’t make their money by putting their money into the stock market. They make their money by charging you for commissions, advice etc.

  40. Justjoeguy says

    The gobblers all lined in a row and then they marched off, confident they were doing the right thing for their God and country.

  41. Yes, people should vote — and dear God, they should vote for Obama.

  42. I’m not worried. I look at bear markets as a great time to start putting my money in the market. Why does everyone go nuts for a sale at Macy*s but not for these Wall Street bargains. I can understand if you are close to retirement, but then what are you doing with a large chunk of your money in stocks anyways?

  43. They (ya know.. them) will fix this problem with new regulations and methods to satisfy liquidity. However, how do you unwind unnatural development and speculation? Since the 60’s, they (ya know) have been putting quick fixes on market imperfections, only to allow the same side stepping of regulation to continue. Fortunately, in business there is a process of recapitalization… however, how do you recapitalize the United States capitalist setting?? The recapitalization process of automobiles may be … 3 months. How long to recapitalize income, consumption, and government spending for the United States?? I am not a socialist – but I don’t want to worry about cashing in my 401k in 35 yrs and having to accept government credits… not in dollars but in a domestic currency not valued in the world market. They need to take their time and fix it for real… I would start w/ regulation on debt to income ratio’s w/ real time reporting

  44. I am quite young and don’t have any money in stocks (other than my Vanguard 401k), so for me this is actually a really exciting time. I’m going to watch the wales of wall street stress out while sit here reading the ticker for the next few months. My prediction for the bottom out is 8-10 months. The market definitely needed readjusting….in fact this recession should have started a year ago but we “pushed” things off and now their is a snowball effect. On a side note – there is an interesting video where Peter Schiff explains just that.

  45. Mark Nelson says

    If you are near retirement or in retirement I’m sure you are nervous. The market will readjust however if you are in retirement now you might have to change your style of living.

    I feel for the retirees who might have to go back into the work force.

  46. I’m young, and I welcome the opportunity to buy low. (I also just don’t have much to lose at this point. I do have almost six figures in retirement, but I can start over if I have to – I am only 30. Not ALL of it is in stocks anyway).

    I also had to add if I was nearing retirement I would have taken a very conservative position in 2006. I agree with some of the other comments – who couldn’t see this coming? Who knows how bad it will get but the writing was on the wall. (I actually did take a little more conservative position in 2006 myself. I have some cash in a CD coming due early next year. I think it will be a great time to buy back in).

  47. Thank you for asking! While I have no practical solutions for weather this “crisis”, I think I know what caused it.

    Simply put, it is our government allowing the price of oil to go from $10 a barrel in 1999 to $150 last summer, unchecked and out of control. Gas went from .75 to 4.35 as well as other needed fuels needed to survive, stay warm and be productive. It isn’t like any practical alternatives are available and fuel touches each and every one of our life’s in food, goods and services even if you ride a bicycle everywhere and burn wood in the winter.

    To allow a necessity like this to trade unchecked, and giving them the ability to do so ala the Mercantile Exchange is criminally negligent. Why are we providing the tools for to make speculators and foreign countries stinking rich? Its only going to come back at us in the forms of foreign ownership flooding the country with there “cheap money” or terrorism, or both.

    So what does this have to do with the crisis? Simply, wages haven’t kept up and people were fooled into thinking they had more income/cash to chase more expensive houses and goods that are only now a hardship. Because the price of every NECESSITY where there are NO alternatives (food, shelter, electricity, fuels, etc) has quickly skyrocketed while LCD TV’s and Digital Cameras have crashed. (This has actually been offered as an excuse why the official inflation rate is so low while our eyes and ears tell us differently, as per Money Magazine.) Only problem is I need a new camera once every 7 years while I need 20 gallons of gas weekly just to get to work and be a productive citizen.

    So that is my thought. Would any one care if gas is $5.00 a gallon now if it started at XX 20 years ago and gradually went up 4% a year allowing it to be properly factored into wages and our budgets?

    So, trade stocks all day long if you have the need to speculate. You can live quite nicely without owning a share if you want. We can’t live (currently) without oil and I doubt any practical alternatives are going to be developed in my life time with the way our government functions.

  48. Justjoeguy says

    The gobblers never learn anything. After they got to their destinations they discovered them to be slaughter houses. But by then it was too late. And so they were slaughtered. But not to worry. They left a lot of eggs around and a whole new gaggle of gobblers was soon born.

  49. Justjoeguy says

    Gobble. Gobble.

  50. I just invested my first $1000 in a Canadian metalergical coal company, then the drop hit now im down almost 50%. It is pretty scary being a first time investor and having this happen. The good thing is that I realize that if I hold out things will turn around. People will always need steel and the coal for the process to make it. The stock is very volatile but the market cap is 0.3B and the company has no debt so I am not nervous. My only complaint is that the age I start investing has to be during a pretty big recession 🙁

  51. Well… All I will say is that I am voting for Democrats and Obama for the fist time in my life. They may not do much better than Republicans and McCain in handling the economy but they cannot do any worse!

  52. Jonathan: But if I was close to retirement and more than 60% stocks in my portfolio, I would definitely have fear. I understand my parents’ fear.

    Huh? Why?

    If you needed the money in the next 10 years shouldn’t you be something like 75/25 or 80/20, with the small number in stocks?

    How can you “plan to retire soon” and still have 60% of your portfolio in highly volatile stocks?

  53. wow, what a change in circumstances, but still not much change in attitudes. i posted here earlier this year (like march), that folks should take into account general economic conditions. that its better to follow long term economic trends instead of worrying about catching tops and bottoms. all the responses were pretty derided me for being an ignoramus. on the contrary, i have studied markets on a psychological level as well as fundamental (as it is a combo of both) for a long time.

    i believe that most of the people who are still throwing money into equities at this point are actually more ignorant. they have a simple view of market behavior something like “what goes down, must come up”. guys, for your own sake, just do this. name all the reasons (real reasons, not revert to the mean guesses) the markets may go down in the next year, and then reasons that it may go up, and you make a judgement call. and look around your neighborhoods, talk to your friends. yes, this is not a statistical sample, but a general economic malaise or general boom time will be obvious in your everyday connections as well.

    and this cheap argument of “oh, i’m investing for the long-term” argument. guys, markets can be down for decades. this is a head-in-the-ground excuse that prevents people from being proactive, and studying economic conditions. don’t worry about catching bottoms. buy when there is a reason to buy. sell when there is a reason to sell. and if you don’t have the time to do the research or capability to, don’t invest in equities. be intelligent with your money. the people on this board jump through hoops to get $100 checks from credit card applications (including me). why are we so reckless with investments that can lose $1000s in a single day?

  54. I just read the headline on Yahoo!: Iceland on the brink of bankruptcy.

    That made me think… at what point could the U.S. be on the brink of bankruptcy?? That may sound far-fetched, but considering that our largest state and “8th largest economy in the world”, California, is begging for $8 Billion dollars just to make November payrolls, at what point to U.S. begin to beg?

    We’re in a situation now where states don’t have enough working capital to continue operations, and a major portion of our states’ respective municipal debt (i.e., bonds) have been bought by overseas investors. Now the states have to borrow from the federal government to make payments on their own debt. Isn’t that akin to homeowners using their line of credit to pay their mortgage? In the face of our current “financial crisis” comes a major accounting change that will sink municipalities even further into the red.

    New changes in government reporting requires governments to expense their future pension costs currently. What does this mean? The best way for me to illustrate this is by example. Assume Johnny Cop starts working as a California Police officer today, and expects to retire 30 years from now. According to actuaries, Johnny’s annual pay in retirement will be 100,000, and he will receive this pay until his death — 18 years after his last day of work, according to the actuaries. Actuaries are able to determine what the cost of his pay in retirement will be now, discounting for present value using some discount rate, say 7%. What this means now is that the local jurisdiction that hired Johnny to police it’s streets, must now expense the future costs of paying Johnny. The question becomes: how does a government with increasingly depleting revenues find a way to cover the huge increase in costs brought on by this accounting change? Federal Government has avoided tackling a similar issue with respect to our entitlement problems (how to pay for future social security and medicare funding). Now or local governments are forced to deal with this issue. Paying huge pension costs bankrupted GM…and i’m guessing it that by this time next year, city bankruptcies will be a recurring story that appears in the headlines.

  55. Look, after the Great Depression crash, it took UP TO 25 YEARS for the market to come back to where it was. People think it’s UNTHINKABLE that this could ever happen again, but that’s where we’re currently headed. Unless you are prepared to LOSE MONEY and not make a penny on your investment for AT LEAST 15 years or more (more like 25 years), don’t invest in the market.

  56. @ xreflux- I totally agree with your comment and i’d expect your sentiment would be echoed by more readers of this forum. But since you “have studied markets on a psychological level”, it shouldn’t surprise you that attitudes don’t change in parallel with changing circumstances. Especially when almost all of the press discourages the kind of change in attitude you promoted in March. That’s why shorting stocks is so difficult and why bubbles blow up. In “efficient” markets, the fundamentals lag emotions. Timing that lag can be very rewarding to some and extremely costly for others. But if you’re not concerned with “timing the market”, then why not invest now? If someone says “i think it’ll be doom and gloom for 12 months”, but that person admits that they really have no idea how long or short this gloom will last, selling their stocks and holding their money now is essentially timing the market. Isn’t it?

  57. GarvFinancial says

    Gaurav here…Good post…the financial turbulence is not going to diminish anytime soon. It is here for another couple of years. The government hasn’t really performed up to task in holding the bankers and their cronies accountable for the purposeful debacle they caused so that they could make money in the housing bubble and the ensuing downturn by consolidating banks, strengthening their financial positions as well as buying up cheap stocks.

    Remember the $700 billion is the greatest migration of private debt to public debt ever..unbelievable. This is just the beginning, you will see more disasters in the near future, more artificial reasons for consolidation and less accountability of bankers.

    The current $700 bill accountability measures of oversight by the government are a joke and will not withstand the test of time. You and I are in hoc for more debt, $2,500 per woman, man and child in America, thanks to the private interests overriding public interests.

  58. The stock market is a much better deal now than it was a year
    ago. But look at the number of people panicking 😛
    I’m steamed I can’t put MORE money into stocks now, but it’s
    true that now isn’t the time to be in stocks on margin. Either
    the world is going to end, and cash or gold is not going to be
    easy to use in a Mad Max world, or it’s going to go on, in which
    case you want to be invested, at least partially. BTW, vote for
    whoever you want, but not on the premise that they are going to
    help the economy. THAT IS NOT GOVERNMENT’S JOB!

  59. actually, I do think people should time the market. but as part of long term economic trends with the observations of the markets psychological behavior. not because “what goes down, must come up”. when you have both going for you, that’s when you should jump in, and don’t worry because you’re a little late to the party. good economic conditions build upon itself and grow equity.

    at this point. the psychological feeling is clearly negative except for some people hoping it will jump back up. as for the fundamentals (and i’m talking about jobs being lost, and companies can’t get cash, real things that really hit peoples pocketbooks), all are clearly negative right now.

    if one wants to put money in the market right now, you can, but the odds are clearly not in your favor, and chances are that you will end up losing money than gaining over the next year. i rather wait until both conditions are in my favor, and have a greater probability of making very good earnings.

    anyone who has been dollar average investing over the past year is going to need unreasonable returns to make that money back. when you invest without a reason to invest, you are gambling with the odds stacked against you.

    i may be wrong on this, but i’ve been right enough that i’ve made good returns in good years and retained most of my capital in bad years. much in excess of just passive index investing. (which trust me, i used to work at a mutual fund company, they will push you to stay invested no matter what. every day i talked to many retirees who lost 60% of their net [this is from the 2001-2002 recession] and my bosses telling us to get them to switch them to a different equity fund as opposed to getting into a money market when the market was tanking. make your own decisions, and have real reasons for making them. if you don’t understand whats going on, stay out of the markets and save your money till there is stability, and then traction for an upswing. you’re going to lose 30%, hoping to not miss out on the that 8% upswing.

    i will be looking to get back in. but i’m waiting for a reason

  60. Buy and hold is for lazy people and just because it worked in the past does not mean that it will in the future. When we look back this was an era where no money was made in the market over the last 10 years.

  61. buy_and_hold says

    When you invest in indexes that tracks large and small companies across the globe you are betting on only one thing: That the world continue to grow and corporations at large will facilitate that growth. In the process you are rewarded by supporting that growth in terms of dividends and stock value. If you say that equity market is never ever coming back you are essentially saying that whole world will come to a stand still forever from now on. If that’s what you believe than stop investing in anything stash gold coins under your mattress.

    It is a very nature of any investment be it Govt Bond or Interest on your cash deposits: You are simply paid as facilitator of growth. This is the most fundamental aspect of all borrowing and equity. The root of equity markets lies in the early trading companies that use to fund shipping expeditions among other things.
    Things have change complicated investment vehicles like LBO, MBO, CDS and other derivatives (and likes of Cramer) have appeared but the basic remains that stock market is a barometer of world’s growth. Not believing in it is like assuming world will come to a stand still. Even if you build your portfolio entirely on bonds (treasury, Muni , Corporate) you betting on growth. I would suggest the following:
    1. Put your fears aside. Only people who should really panic are retirees (with big equity exposure) or those whose short term emergency fund is sitting in Stock market.
    2. Make your monthly contributions, you will be glad you did. You are buying more for less.
    3. Don’t lock your paper losses by selling. You will gain nothing.
    4. Stay in Indexes as opposed to Stocks. Leave the stock picking on to S &P and Russell and Warren Buffet.
    5. Only borrow what you can pay.
    6. Panic is good for your portfolio in long run.
    7. Read (Re-Read) Richest Man in Babylon and Four Pillars
    8. Always remember bubble will come and go. This one will pass too and new one will start to form.
    9. There will always be examples of NASDAQ at 5000 and NIKKEI at 40,000 and never coming back. But a diversified portfolio will never suffer that fate.
    10. Diversify, Index, Re-allocate, Maintain a world balanced bond and equity portfolio, invest periodically and let the power of compounding work for you.

    Keep calm and if anything we will emerge out much stronger out of this. The greatest generation came out Great Depression.

  62. Hank Paulson has promised to get us out of this mess, so lets give him a chance to work his magic. We are facing some tough times….we need our best minds on this problem. And remember, Hank himself is a pretty savvy money man. He has a personal net worth of over $700 Million!

  63. Just read a post about historical return comparisons show T-bills to have been a better investment for about the past 20 years, on average.


    Crossing Wallstreet: What Equity Premium?

  64. buy_and_hold says

    There is a fundamental flaw in that statement because it assumes that you invested 100% at the peak and never invested a penny after that. Not to mention 100% in DOW with no Bond allocations. Also that statement doesn’t account for 2% reinvested dividend.

    A well balanced portfolio with periodic investment is far from such a situation. You only invest a small percentage at peak and valleys and a large percentage at all the points around it. It gets averaged out in long run. Also for every year in bull run you actually lock the gains by re-allocating (not market timing). For example in 2005-06 you would take your international portfolio re-allocate some to of it to your bonds. In 2003-04 your domestic portfolio would need re-allocation. This year perhaps your Bond portfolio might need re-allocation.

    The point is your statement doesn’t take into account many
    fundamental aspect of sound investing, which are (in the order):

    1. Balanced Portfolio
    2. Re-Allocation
    3. Periodic Investment
    4. Power of Compounding
    5. Calm (during panic sell offs)

  65. Banditfist says

    John, to put your faith in Hank Paulson is short sighted.

    He and Bernake have been wrong EVERY time of the last year.

    Subprime is contained
    The $150 Billion stimulus package will help.
    Bailing out JP Morgan via Bear Sterns was the right thing to do.
    Passing the $300 billion Housing Bailout bill will cure everything.
    Giving me $750 billion blank check will do the trick.

    He was the CEO of Goldman Sachs. He walked away from that job with over $500 million tax free to become Treasury Secretary. He only does what help his buddies on Wall Street.

    People keep bringing up the Great Depression. Depressions have generally occurred every 20-30 years over the past 400 years.

    All fiat currencies have a limited life cycle. They are not sustainable.
    The stock market went parabolic starting in 1983 to today. Reversion to the mean will occur. It has to. Just like the housing market is still another 20-30% more to drop.

    Just heard that the Congress is now wanting to screw around with 401k plans.

    How does freedom end? With thunderous applause!

  66. [Look, after the Great Depression crash, it took UP TO 25 YEARS for the market to come back to where it was.]

    Uhhh…yeah from peak to peak. Don’t be silly.

  67. Indexes like the Dow and S&P 500 do not include the additional return from dividends if you invested in those companies. Earlier last century, that along would be on the order of 4% annually. These days, it is more like 2%.

  68. After experiencing many ups and downs, the Japanese Nikkei 225 index is at the same level it was 25 years ago. How scary is that?

  69. Justjoeguy says

    The gobblers love their owner because he keeps fattening them up. So they just keep marching toward the slaughter house.

  70. Scott Armstrong says

    Yes, John, that is depressing. But that was yesterday. Don’t look now, but the Nikkei is down 11% so far in its trading day…

    Stocks beat bonds in the long term? Really? How do we really know this?

  71. Scott, we know this to be true because that is what all the mutual fund managers and financial advisors keep telling us.

  72. I wish people would be better about following what’s going on. Why do people blame the president when the market is bad and praise the president when the market is good. Makes little snese to me as it takes more than one person to run the country.

  73. I’m wondering if now is the time to pad those Roth IRAs or 401k and not next year before the tax deadline.

    What do you think?

  74. The Great Depression and the crash of 1929 are not the same thing.
    It wasnt the Great Depression crash.

  75. I don’t know if it is the right thing to do, but I am young and I see this downturn as an opportunity buy low. I just increased my 401k contributions today to 10%, it’s still not as much as I would like to be putting in but with the market like it is, that extra 2% will get me more now than it would have 2 months ago.

  76. @ xreflux – Well said.

  77. I think the tale that the market will on average return you 10% a year or whatever it is over the long run is becoming a kids story. If the long run is 50 years, this saying doesn’t take into account the kind of mess that we are in right now – this has never happened before. What “average returns” can we be talking about, what we are witnessing now has never happened before.

  78. Today, I was driving in the traffic and I had an epiphany about timing the market, of sorts. It looks to me as if it is like timing the traffic. The traffic can have coarse grained predictions if you get on the highway at certain hours or if there is a sports game nearby or there are accidents ahead or there is a holiday weekend, etc. However, trying to beat the traffic by constantly changing the lanes wont get you very far. I paid attention to the cars near me when I got on the highway and then I saw them near me again after one hour or so. I thought they would be far behind. The point is that maybe others were trying to beat the traffic as well, or at least to gain just a little more than the other drivers but in the end the traffic has a certain volume that is spread evenly across lanes.

  79. I have been in the financial planning business for two and a half years now. Many of my peers believe in the ‘rule of 100’: take 100 and subtract your age, then allocate the percentage of your age into ‘safe’ money and the rest into ‘risk’ money. Example: someone 70 years old would have 70% of their money in something that is safe and 30% in something that is risky. Safe money is defined as anything that can not lose principal. I always was a little bit wary of this ‘rule’ as many of them used it primarily to sell annuities. However, I doubt that any of their clients are complaining now.

    Most people really need to assess their risk tolerance (beat the dead horse some more). Annuities have gotten a bad name mostly because they are sold for high commissions by salesmen. Don’t let bad press and bad people skewer your judgment. I suggest that anyone over 50, or within 10 years of retirement take a good hard look at annuities. Research products from companies such as: Prudential, Allianz, ING, and Lincoln Financial.

    I have always been a strong believer in the market, and as a 24 year old, will stick it out while continuing to dollar cost average, but as I get older I will definitely hedge my risk with annuities, cash and bonds.

    It is also very important to do planning, account for inflation and amount of income needed off of investments in retirement before you use any ‘rule’. Those that don’t have a pension and are close to or already in retirement will likely have to work until they die if they followed the 110 minus age rule.

  80. This NYTimes article seems appropriate for this discussion:


  81. Edification says

    Everyone is writing like they only live on one side of the equation. You can profit when the market is going down w/o learning the complexities of short selling or puts. Do the same thing you do with any other stock or ETF and buy ETF’s that short the market. Look at DXD – this is an ETF (trades like a stock) that shorts the Dow. It is up 86% over the last year.

    With the right mix of ETF’s that short the market you can counter the losses in other long positions.

  82. Tom - Recession Proof Jobs says

    You are right. A lot of the younger generation (myself included) have not seen negative sentiment like this before however I see it as a great opportunity rather than worrying. There will be some great buying opportunities arising.

  83. buy_and_hold says

    I also dabbled with the idea of a balancing already diversified portfolio with inverse indexes (most notably Rydex). Check my previous posts on it in this blog. I did some homework to realize such hedging can only work in short run and you need to time the market. For example, buying S & P 4X/2X inverse at the peak might give you a very healthy protection against the down side. But you have to exit the position before market turns around to realize any gains. We all know it is hard to do. Another option is to buy S&P 2X long when you know market has hit the bottom which again requires market timing. Either one looks good on hind sight but can’t provide any realistic protection without truly timing the market. I still think only traditional hedging such as bond-equity, emerging-developed market, smallcap-largecap tilt can realistically work in long run.

  84. Phil
    if you bought at the 1929 top you didnt break even till 1955

    Right, but you’d still be able to capitalize on the growth from 1929 to 1955. This isn’t about “breaking even” it’s about increasing your purchasing power in a material way from the time you invest it to the time you decide to spend it.

    Most people don’t have a single static pool of investable money, we live with years of consistent cash flow.

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