Magnifying Fear and Joy In The Stock Market

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A co-worker of mine disclosed today that she moved her entire 401k to cash and bonds last week. She is older than me and has what must be a sizable balance because her reasoning was “I couldn’t stand it anymore, all my contributions for the last year have disappeared! Why did I bother?”

I thought that it was an interesting – albeit dangerous – way of measuring returns. I can see how it can be depressing if you start with $100,000 at the beginning of the year, keep putting away $1,000 every month for a year, and then at the end of year… you still have only $100,000 due to market drops. It can be easy to view it as simply throwing money away. I miss the safety of cash!

But this is dangerous because comparing absolute changes in your entire account to your current contributions would seem to greatly magnify any gains or losses in your account. For example, if you start with $100,000 put in $1,000/month for a year in a bull market, you might end up with $124,000 at the end of the year. You put in $12,000, but your balance grew by $24,000! Feels great, maybe I need more stocks! But in reality this is basically the above scenario in reverse, and nowhere near a 100% return.

This way of framing losses reminded me of the popular behavioral finance book Your Money & Your Brain. Are our brains just wired poorly to deal with the swings of investing?

On the other hand, perhaps this should also serve as a reminder to properly assess your appetite for risk. Going back and forth between lots of stocks and zero stocks is highly unlikely to return in better overall returns. Numerous academic studies have shown that even professional money managers don’t do market timing well at all. Simply picking something in the middle and sticking with it actually turns out better. We can try to use these gloomy times to try and find that balance where we won’t be tempted to go either way in both good times and bad.

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Comments

  1. Siggyboss says:

    There’s nothing wrong with our brains. The average person lacks experience and the knowledge when it comes to investing. This person doesn’t know that the money manager of a fund is what generates the returns; if he leaves you have a different fund. Nor does the average person have the experience to know there are always certain sectors performing well at any given time. Even worse, the average person is a long-term investor because they don’t know how to read a financial statement and don’t have the experience of losing everything due to ignorance. I still hear people buying the financial stocks for the long-term, refusing to realize their loses, and get into commodities or at least anything else – you can always buy the financial stocks back. Last I checked it’s better to make as much money as possible, as *quickly* as possible.

  2. It sounds like she maybe dove in without first educating herself more in regards to exactly what *might* happen. I agree Jonathan, that a thorough risk assessment is valuable if maybe only for the fact that people can say, “Oh, this is why I’m feeling this way, because of X” instead of going into panic (all cash!) mode.

  3. Siggy – have you ever READ this blog you’re writing on? The author talks about investing for the long term and NOT trying to play the market. That’s the BEST strategy for anyone looking to retire on their money. Trying to make as much money as possible as quickly as possible is exactly how you LOSE a lot of money. Making money quickly means investing in risky stocks, which by definition might go up rather than down.

    What good is it if you make $10,000 this month but then just lose it next month?

    The advice on this blog and most others that I’ve seen for anyone looking to invest for retirement, which is by definition, the long term, says to invest in index funds. Their low management fees makes a huge difference in the long run, and no individual fund has outperformed them for any extended period of time.

  4. Maybe Jonathan’s co-worker should be viewed as a contrarian indicator, as she repeats the truth that people cannot time the market, as they enter and exit at the wrong times.. Numerous studies show that individuals who time the market underperform it by several percentage points/year. Sure, you have less than 5% of people who are “successfull” market timers. But is that due to luck or due to skill?
    If you have 100,000,000 people playing the stock market you are bound to get several thousand of them to be extremely “good “at it.
    But what are the odds that you are a successful stock market timer?

    Siggyboss is talking exactly what a market timer tells you- chase the hot sector and ignore the “cold” sector. Which made sense over the past 1 year. But which one will be the next “hot” sector? And why are you so certain that the current cold sector ( financials) won’t outperform the market over the next 12 months?

    The issue with timing the market is that most people use sophisticated computer models on past data to obtain a great looking above average performing strategy that worked super well in the past. Armed with all this “knowledge” this person starts trading the system full-time and then they realize that the market has changed and they start losing money.. No problem.. Let’s tweak the parameters even more.. The system now looks even better on past data.. But yet the market changed again.. Let’s tweak the system once again..

  5. I’m going through this right now with my 56 year old mother as well. She is constantly checking her 401k balance and freaking out.

    I think a lot of it comes from the fact that she doesn’t understand the market and how it works. She is also surrounded by idiot coworkers that get her all worked up because of their lack of understanding. If she worked at Vanguard I could understand, but she works at a tool manufacturing plant where the people she is listening to know just as little as she does about investing and on top of it they are also in debt up to their eyeballs. I understand why she gets worried about her nest egg, but I can’t understand why she is always listening to broke idiots about investing.

  6. People need to relax and stop checking balances. The market goes up, the market goes down, it is just a cycle. my sister asked me if she should move money out, and i said ‘well, since you admit you don’t know anything about investing, why don’t you throw more money at the market?’ people need to realize that maybe this is just a fantastic time to BUY stock.

  7. Siggyboss says:

    nate – I’ve read this blog over a year, but that doesn’t even matter. The ‘BEST’ strategy is to be active if you have the time, or let someone else actively manage your money if you don’t have the time. I guess the ‘BEST’ strategy for retiring is solely bonds because preservation of capital is the main focus; solely stocks for the young.

    The average reader probably cannot read a financial statement and hasn’t been actively investing for more than a year. Probably doesn’t know fund managers matter. Oh well, because they’re told over and over to just hold for the long-term. Those who held the S&P 500 for the last ten years are up a huge 12% excluding dividends. Few wake up rich buying stocks.

  8. I can’t imagine being a few years older and looking at retirement right now. It’s a scary time and even though we know we should buy and hold, it’s not always easy to actually do. In times like these there should almost be artificial barriers to selling!

  9. My husband started studying the market closely last year and told me to move my money out of my stock fund then. I wish I would have listened now, but pulling large amounts of money out of funds scares me a lot and I am definitely in this for the long haul, at least another 20 years. So, well, he was right, but the previous year he would have been dead wrong. My gains were much like that example. Of course, as you near retirement, this game definitely loses its appeal.

    I really hope that my contributions (which also look like they weren’t made at all now), are actually buying up stock funds at very low prices and will turn around and blossom when the market picks up. I sure hope so.

  10. Wow, that’s definitely a pretty hardcore route to take. I’m def. one to b*tch about the market here and there, but like others i’m in it for the long haul. I don’t have the cajones, or desire, to cash out…literally. But whatever floats ya boat.

    HUGE difference age plays of course, but for now it’s def. time to enjoy some dollar cost averaging!

  11. ChrisMr says:

    I just threw a grand at Ford and GM. Worst case I lose it and go on with my day. Best case, GM grows the 800% it has room to grow before reaching its 2000 levels ($90), and ford grows the 600% it can before reaching its 1998 level of $34. Call this my version of going to Vegas. Its a small amount of money, it isnt how I plan to fund my retirement, and if I lose it, well, my odds on GM surviving are better than my odds if I throw it in a slot machine. Maybe I should have had a beer in one hand, a smoke in the other, and a smelly old dude sitting next to me when I made the buy!

  12. @ Chris

    Just because a company is large, has a long history, and has a solid line-up of products doesn’t mean that its stock will necessarily return to its former glory — just look at Lucent or Nortel, which have not yet recovered anywhere near their euphoric late-1990s highs. GM and Ford will likely survive, but their stocks may well stagnate for some time. I know you’re treating this as play money, and no one can predict future stock prices, but the “room to grow” line of thinking is not sound logic.

  13. The truly intelligent investors right now are the ones putting more money in the market. It is against common wisdom that you buy at times like this (low) and sell when you’re making a ton of money (high). I just know that with a dollar cost averaging scenario, NOW is the best time all year to put some more money in the market. I’ve got 40 years before I retire, so these swings don’t mean much.

    As a side note, to help me put these things in perspective, I like to go to google’s interactive DOW graphs. Find out how long you have to retire, then go back that many years. See the ups and downs? See how the recent decline looks like a little blip when you go out 50 years? Perspective is a hard thing to get with the market, since the lemmings on TV make every turn sound like a crash or rally. Slow and steady wins the race, and it’s less stressful too. Remember, stress has a direct impact on your longevity, so invest right and you’ll also live longer!!!

  14. My coworker (in her 20s) said her financial advisor recommended that she only invest her 401k money into Money Markets right now, saying that if she invests in the S&P 500:

    “You will be buying low and most likely watching it decline for a few years. In the long run the strategy should pay off if you can handle the risk. Of course no guarantees.”

    Could the S&P 500 really continue to decline for YEARS??

    That seems crazy. I (also in my 20s) have been stocking away money into the Total US and Total International this year, during low points, based on the belief that it will surely start heading upward again within a year. But another coworker who’s into investing also said to stay away from stocks for the time being, and stick to money markets and bonds.

    So I don’t know what to believe!

  15. ChrisMr says:

    Ok… maybe room to grow was a bad use of terms… i just figure that GM and Ford, or at least one, should grow to some shell of their former selves, and if that is 50% of what they were, thats fine short-term… I have a 25-30 year window to work with, so Im thinking long-term opportunity for a growth spurt… I dont think they will both be down for that long.
    This whole mess reminds me of a guy I know who bought a ton of wine in the 60’s. It was cheap and noone else cared about it. Today, he literally has a fortune in his basement wine cellar.
    I figure my stock purchases, GM and otherwise, are simply a chance to buy something crazy cheap, and hope it gains value over the next 25 years.
    Im just glad Im not retiring tomorrow. This cheap pile of stocks could really pay off for someone my age….28 and counting.

  16. Yes, it might be a good time to buy something. But market still has room to fall. And there are still tons of factor that could ruin it. It’s ok if you are traing and prepare to take looses.
    But not with 401k. For this time it would be nice to move everything out of stock into less risky choices. The this is, move out of stock until market turns around and not loose this money. wait on a side line till market reverses and then move back into stocks.
    Why wait and watching your 401k shrink day by day for next couple of year? why no preserve what you have in save investment until thing turn around?
    Does any one know for sure how low is the low? if not play safe.

  17. "Mo" Money says:

    Buy and hold is good for those with a longer time frame until they reach retirement. But if you are close to retirement, this is a bleak time for your 401k. And if you are in retirement it is even bleaker.

  18. ChrisMr says:

    Slava…. when is the low… what if you miss it… sure, your account value shrinks, but the number of shares you have continues to grow, so your growth will be exponentially greater later. I look at it like this. Yesterday I bought an apple for $1.50. Today I bought one for $1.45, and tomorrow I assume I will buy one for $1.40… I could sell all three the following day for $1.35, or hold them all for 25 years (these are magic, non-decomposing apples) and when apples are worth $6.25, noone will care that I bought them for $1.50 or less, I can sell them for a profit. This is why I keep buying, realizing that I have time and as long as we dont repeat 1929, I should be OK.

  19. That is a sad story and one that I hear often. The challenge now is when to get back in. How does one decide when decisions are made by emotion?

    And while there are plenty of tools to measure risk tolerance, I prefer the term loss tolerance. Many can believe they can handle risk and volatility as markets are going up, but have not yet been tested for loss tolerance. With the market movements over the past few months, they now have and have learned that their tolerance for loss is not very high.

    And often investors forget their real time frame for investing. If one has 15 – 20 years until retirement, actuary tables tell us his/her investment time frame should be 40 – 65 years – not the time until retirement.

    These are tough lessons and unfortunately many hear but do not absorb them and will be left on the banks as the investment boat floats on by.

  20. But, Slava, if you have lost money recently in your stock funds and now sell them, you have a realized loss. If you jump back in later, you’re timing might be off too. You see the market surge, jump back in, and it declines again. You then lost your money twice. Since there’s really no way to accurately predict when the market will turn — if you’ve already taken a hit, it kind of makes sense to sit still. Of course, my husband and lots of other people would disagree and say, “you could pull out and make money somewhere else and then turn around and hop back in at just the right time”.

    But think about it — if you could time the market, then you could be a millionaire. If you could time the housing market, 10 years ago, you could also be a millionaire (“timing is everything”). But these are really hard things to do.

    I say all this, however, as the person who “sat still” and earned less than 2% a year over the last 10 years. But, still, I have my money. My husband lost his money 7 years ago. That’s why he’s reading all these books now!

  21. clicclic says:

    There are two repeated themes in the preceding comments that frighten the hell out of me – and should scare you too:

    1. Invest for the long haul
    2. Invest for retirement

    These themes, which we’ve had pounded into us since childhood, are not guaranteed AT ALL. I repeat: do not assume these ‘strategies’ will work in the future.

    You are seriously putting yourself at immense risk trusting wall street banks and the US gov’t with your money and your money’s purchasing power.

    The smart money is diversifying like crazy OUT of the markets. The stock market should be only ONE investment for you – not the ONLY investment for you. I cannot stress this enough people. If you want to retire (an obsolete concept), retire now – start a new, second career investing in land, your education, precious metals, art, anything tangible.

    The pain that is coming can be avoided but stop expecting the two most corrupt, controlling entities in the world (Wall Street and your friendly Federal Reserve) to “do the right thing.” They DO NOT have your interests at heart…

  22. Us young pups want the market to tank. This will enable us to buy stocks at a relatively cheap price and enjoy a lifetime of relatively large dividend payments. We buy stocks for the dividends just like farmers buy cows for the milk. If the market happens to go crazy when I retire, I’ll send my sell my stocks off as a farmer would send a cow off for butcher. I’m not opposed to that.

    Let the market crash!!!! Us young pups are uninformed if we desire the opposite.

  23. Independent George says:

    I’m going through this right now with my 56 year old mother as well. She is constantly checking her 401k balance and freaking out.

    If she’s 56 years old, then she probably should be freaking out; at her age, wealth preservation takes precedence over growth.

  24. In reply to Independent George, I am 57, soon to be 58 years old and do not believe that wealth preservation takes precendence over growth. At 56 or 57 we have decades of living before us and if one moves to wealth preservation at this early age then the chances of outliving his/her money is significantly higher.

    Create a diversified portfolio mix, stay the course, at retirement time keep two years of living expenses in cash, each year make a decision for a year’s worth of distribution and move that amount to the cash bucket, never exceed 4% in distributions, back off and tighten up a bit when the economics of things call for that, and enjoy life and living.

  25. the woman probably can’t wait out the cycle and see her retirement shrink by 15%… put it in cash for 5% instead of losing it while the market tanks for another 2-ish years, and then re-evaluate…. the goal is to buy stocks “at the bottom, not on its downward slide… depends on when a person thinks it has bottomed out…

    i would rather put money in cash and have positive gain, than put money in for guaranteed loss and hope the market corrects sometime in the future to make up for the losses already sustained on the downward trend….

  26. Redgtxdi says:

    Wow!!

    Me sees LOTS of ignorance in today’s responses!!!

    🙂

    (Grabs popcorn & lawn chair)

  27. Buy low, sell (hopefully) higher. A 56 year old
    lady still has a pretty long time horizon, and now is
    NOT the time to get out of stocks. (If anything, now
    would be a good time to increase your stock holdings,
    if you’re younger) No guarantees, of course, but most
    of us always told ourselves we’d buy more if the market
    went down. Now’s the time to see if we meant it

  28. For those people who want to get out the stock market now and hope to catch in uptrend, if they are such good timers, they wouldn’t sell the stocks now but they should have sold months ago. If you have good faith about the market, stay with it.
    Missing the 10 best days in the past 15 years, annualized return drop from about 10% to about 6.5% (http://www.fidelity.co.uk/pdfs/direct/doing_nothing_best08.pdf). Nobody knows when will be those best days.

  29. anxiously awaiting the June08 summary

  30. cliclic: Retirement is an obsolete concept?

    I feel sad for you.

    You say: Invest in anything tangible (besides the stock market).

    The stock market is a tool for efficiently investing in tangible assets and non-tangible assets.

    I presume that you think “other assets”,i.e. tangible assets, besides stocks will retain their value if we have another Great Depression. If you review your history you’ll see that everything dropped like a rock – gold, silver, stocks, real estate, nothing was safe. Yes, even collectable art dropped because the market for it dried up. If we have a Great Depression everyone’s pile of “stuff” will get smaller.

  31. ChrisMr…
    I’m not aiming to get exact low to pull out or exact high to get back in.
    As you were saying about apples. You got one today $1.5 and tomorrow @ $1.45 (or week later). But by that time you realized that it very well could be worth $1.0 with next two weeks Are you going to still plunge money? Or take 5cents loss, keep it on saving and see what happens earning at least something? I’d rather realize 3% loss now and not wait till another 30% hit me on top of that. Once apples start growing from $1.00 steadily back up I’ll get back in. Let’s say @ $1.35. But with preserved capital. Thought I understand keep on buying more since it’s getting cheaper and cheaper day by day. Thus with same contribution get more stocks and more. But no one yet stopped such things as bankruptcies of companies. And we have not yet seen any of the banks there. What happens if the fund has a lets say a portfolio of airline stocks that ceased to exist and stock worth $0? Apples could go bad overtime and you might have to throw them out without realizing $6 later on. And chances of apples going bad much greater now.

    mimi…
    I think most of my reply to ChrisMr is also related to your post. Average person don’t need to time market exactly. But need to realized when enough of taking a hit is enough. If you lost 3% and know that you will get hit with another 30% why not for now wait on a side line losing only 10%? I have not seen this plungecoming but I don’t think we are stopping at where were are now. I think it would get much worse before it’s gonna get better. But that’s my thinking and that’s why I think I’d rather take 3% hit now than more later with thinking in 30 year it’s gonna be great.

  32. Jonathan, once again, great post! And as far as comments go, it is kinda fun to watch some claiming to be in the buy-and-hold camp while moving into safe investments just to wait out the storm.

    Redgtxdi, pass the popcorn, would you?

  33. I love this downturn! I’m in my early 20s and buying up as much as I can as the market goes down.

    Getting out of the market as it goes down is a terrible strategy. The best strategy is figuring out how much you are willing to lose, and then invest in an allocation that meets that risk. Standard deviation is a big help in understanding this. If you want to take your money out at a 15% downturn, then you should always be in cash/bonds/TIPS. You won’t lose as much money, but you won’t make as much either.

    Remember, the standard deviation of the S&P 500 is about 18%. That means in a typical year, you will see movement up or down 18%.

    If the market was up right now, would you still want to take your money out? You should say yes, because the object is to buy low and sell high.

  34. Buying GM and Ford doesn’t make a lot of sense… for one, their returns are highly correlated (80-85% I would guess). You’d be better off buying two less correlated distressed stocks… to get similar expected return with lower risk.

  35. sporktv says:

    Yeah, I’m nervous. I still keep investing 401k as usual, but I’ve backed off of anything additional.

    Phrases like “stay the course” used to seem like a good idea to me. Then came Bush. I’m reexamining the whole “stay the course” mentality.

  36. The law of recency says that we tend to make conclusions based on recent events. We look at those recent events and conclude that they will continue on into the future. We saw that in the large cap/high tech melt down in the late nineties and in the recent mortgage troubles.

    The current situation is a real test of our beliefs. Have we constructed a solid, diversified portfolio based on an unemotional decision making process? If so we should not loose a great deal of sleep over recent market declines. They happen and will happen again and again. Market declines are the cost of earning long term returns that beat virtually any other investment out there.

    For those who think that they can take their money out at a loose now in the hopes of avoiding more carnage and then pick the time to go back into the market to take advantage of upcoming gains I say good luck. That is easier said then done. Surely you have seen the data on returns where investors missed a few key trading days and found their returns to be substantially less than if they were invested.

    So if we have done our homework why make hasty, emotional decisions now? Relax, stay away from CNBC, keep contributing every thing you can to your 401(k) and Roth IRAs and other accounts if possible and stop tracking daily, weekly and even monthly returns. We are long-term investors which means we have decades to go, even if, like me, you are in your middle to late fifties.

    This post has definitely generated some emotional conclusions and knee jerk responses. Back away from the ticker tape and enjoy life, living and your families. Stop listening to the so-called expert at work or even the expert on the television. They are all making prognostications based on limited data and many if not most will be wrong. This is a great time to be alive, and while the current economic situation may seem different than in the past, in many ways it is exactly the same. For those worried about companies and sectors facing an imminent demise, if you are invested in a diversified portfolio of high quality, low cost mutual funds your money is spread far and wide and the ebbs and flows of a single company or sector will have minimal long-term affect on your holdings.

    If you went to the supermarket and saw that tuna fish was cheaper this week than last, would you turn around and go home and wait until the price increased before buying?

    News flash – its all tuna fish!!

  37. ChrisMR says:

    Recent history shows us that everyone sells on the way down, buys on the way up, and loses money somewhere in between, because the loss they experienced and the gain they missed outweigh their attempts to time things.
    The Ford/GM thing is a tiny gamble with a small downside… I lose $1000. And a big upside… I make $5-10K because one or the other gets its act together. Or, nothing happens and I get a good show in the meantime.
    My 401K is diversified to beat the band, I have a rollover 401K that I manage that is diversified with another investment firm (private/public sector thing – couldnt tie them together), I have tax-paid investments 3 places, and each of those are diversified as well.
    Like many people, I have more in cash right now than I would like, but Im still popping a % of every pay directly into the market, and making quarterly (or so) purchases on my own a few places.
    I agree there isnt much benefit to owning a Monet during a depression! Why does everyone think they hold the key to timing the market, while they sit at a 9-5 working for someone else? I think regular purchases take the emotion and the chance out of it.

  38. Timing the market *is* gambling. I know this is not vogue, but research and investing is the way to go.

  39. clicclic says:

    Wes: thank you for commenting on my comment.

    The fed cannot control a depression because deflation cannot be controlled. But they can control inflation.

    For this reason buying tangible assets, which the market IS NOT (stock ownership through the markets is NOT tangible), is your best defense. Land, collectibles, your financial education, homes with positive cash flow, local businesses, etc are your best defense. Especially productive land.

    When a corporation gets liquidated, do you honestly think you will receive any assets – unless you’re holding strictly preferreds or the sole owner? A similar question: if your bank fails, do you honestly think you’ll get your FDIC insured savings back within the first month? Forget it…

    Retirement is an obsolete construct because our retiring population is becoming larger than our working population. Who will pay for these entitlements? That’s right – inflation. BUY TANGIBLE ASSETS…

  40. Not to throw too much cold water, but who do you think creates/perpetuates studies showing that market timing is inefficient? It’s long-only asset management firms, especially those managing 401(k) money (give us your cash forever).

    There are studies showing the opposite, and there’s an entire actively managed fund industry (hedge funds, etc.) that proves that at least some people can time the market. It’s also not rocket science to consider, as Paul Tudor Jones says, that “only losers average losers” by investing into something as it declines. Why would you buy a declining asset without first determining to your own satisfaction what it’s true value might be? Just blindly buying a falling S&P without any analysis is silly. Your co-worker might be OK putting more and more money into a declining market or she might not.

    Also, this theory that the stock market does OK over time is simply silly. The 7% number so often quoted is not a real number, but a historical artifact that traces back so far that it’s measuring returns from small volumes pre-1960 well before pension funds really got into stock investing. Bonds get much maligned, but over the 34 years to 2003 (for instance) stocks only outperformed bonds by 1% a year – more money, yes, but given the risk? The idea that, over the long run, stocks outperform requires faith. See Maggie Mahar, Peter Bernstein, Martin Barnes…

    We’ve been on a quarter century tear following Volker’s strong actions to shore up the dollar. Now we have hit the wall and spent down our reputation. The dollar is shot. Housing is shot. Credit is blown out. Oil at $4 a gallon makes everything more expensive to move around. Consumer consumption is dying. The market, as a whole, is in very deep trouble like we haven’t seen since the 1970s. We’re not just going to rally out of this one; it might take 10 years or longer. There are some good sectors, but on the whole your friend seems right to be worried.

  41. Well, I increased my contributions to my 401K yesterday. Let the market go down for years. My timeframe is actually 40 years.
    Thus this portfolio is an all stock portfolio – US Large Caps, US Mid and Small caps and International Developed Large Caps. All is invested in index funds of course with small expense ratios. Even if my funds do nothing for years, dividend reinvestment would provide me with decent returns over time, which will outperform bonds.

  42. ChrisMr says:

    and hey, if the market gets bad enough, people wont be able to meet their bond obligations anyway. guess it is time to buy barrels of oil and hide them in the basement.

  43. ChrisMr: I hear you. It’s not a terrible idea! (Is it legal?).

    It’s really scary, because the people in charge have never known a secular bear market. They think every uptick is going to take us back to 1982-1999, but that’s over. Commodities might have a while to go yet. The last boom, ending in the late 1970s (or peaking around the deposal of the Shah in the early 1980s) lasted about 15 years, I think. This one hasn’t run its course, but speculation might be making it a bit frothy in the short term.

  44. How about Japan in late 1989, where the “sound advise” was to “stay the course” and continue putting money into those index funds that tracked their own NiKKEI exchange?

    As it tunred out, the initial problems of 1989 were only the begining of a long trend downward.

    If I’m not mistaken, those “wise” Japanese investors have still not recovered their money back, almost 20 years later!

  45. Banditfist says:

    Go Siggy!!!

  46. Cash and bonds have my vote. ING has CD paying 3.3%.
    Looking for better stock buying sometime in 2009,may start with China.
    Best way to make money is not to loose any.

  47. Lets assume you cannot time the market. You can, however, make investment choices based on what is going on at a certain time in the world. Is the economy inflationary or deflationary. Is the fed funds rate low or high. What are the trends? Hopefully, you can figure out and buy/sell on the right side of the curve (ie: sell a little after peak, on the way down and buy after the trough, on the way up). About year ago, I made a comment on this board that I wouldnt buy into the US equity market until the DOW hit 10,700 since I put all my money into commodities in January this year. We are getting awfully close to that 10.7kvalue. However, now Im thinking I should wait until < 10k? This is where I think Ill just have to accept not being able to time the bottom, and just start buying in once the DOW dips below 10k. Anybody want to throw a prediction for market low value (any index) and time?

  48. auntie_green says:

    um. what happened to the old maxim of moving out of stocks and more into bonds as you got closer to retirement? Someone responded a coworker in their 20s was advised out of the stock market. That’s dumb. Its also dumb to be 5 years or less away from retirement and still looking for “a hot stock” –

  49. There were sell signals early last year. As far as I’m concerned all the smart money cashed out last year and sold everything to everyone that didn’t know better. Buy and hold makes no sense, it was invented by some mutual fund that gets all his money for the size of his portfolio.

  50. as someone still in their 20’s, i love times like this. when everyone else is going nuts and selling all their stocks for a loss, i’m moving more money in from my money market account and buying the ‘whole way down’.

    its so nice to be in a position with cash on hand to invest when things head down.

  51. You know what, I have to agree with the woman. Sure, it might not be the best strategy in the long run, but people’s retirement savings SHOULD NOT be based on “the market”. It’s unacceptable that the only way to have employer-matched, tax-advantaged retirement savings is to put ALL OF THE MONEY YOU’VE SAVED FOR RETIREMENT into an account from which your money can simply disappear if something happens in “the market”.

    I’m no expert, but I can tell what this means is that if there were a SERIOUS economic crash, it would be magnified many, many times by the added fact of millions and millions of people losing their entire retirement savings.

    It’s just a bad idea, and it’s unacceptable that there aren’t more and safer options.

    Why won’t employers similarly match (and the government similarly not tax) contributions to an account that’s insured, that might not grow much, if at all, but at least cannot go down? There are those of us who don’t want to accept risk in return for more possibility of growth, we just want security and stability and that’s it. That should be our choice.

  52. The biggest thing that some folks don’t seem to recognize is that you still own the same number of shares in those funds. The “amount of money” in your 401K is just the amount that you would get if you tried to sell all of those shares *today*. The only way that would happen is if you did something truly irrational, like, I don’t know, move everything into cash and bonds to lock in those paper losses…

  53. guess we’ll find out who was right when the markets crash in a couple of months

  54. Investor says:

    Amanda,

    One of the choices in my company’s 401K plan is a money market fund. I certainly don’t recommend a money market account for retirement savings but my example shows that some companies will match a safe “cash” investment plan.

  55. Robert M. Cavezza says:

    I understand the traditional statistics of the 10% annualized stock returns for the last 50 years or so. However, in the past 8 to 10 years or so, the Dow has been leveling off and has not risen as steadily as it has in the past. Perhaps, the market conditions have changed and the 10% annualized returns may disappear, or worse, we may start to see a trend of losses.

    My point – just because conventional market wisdom says to keep your money invested and you will see gains, doesn’t necessarily mean it will hold true in the future. We can all speculate on decisions we make today, but until 5, 10, or 20 years from now, we cannot truly be accurate in assessing our decisions.

    Perhaps she may be the smart one as the market tanks in the next few years. This would have implications for everyone. And of course, nobody will have a smile on their face if this is the case. But just like the rest of life, we are all clueless in regards to what the future holds for us.

  56. I am 60 in December. I “dollar cost averaged” a great deal of my equities out before the market dropped significantly. I am now 75/25 non-equities/equities. Each and every penny I took out was between July ’07 and February ’08. All was taken out at a much higher value than it was invested. Here is the thing. During my highest earning years, I have dollar cost averaged into two bubbles. When I saw the debt problems coming, I saw plenty of risk of finding that the money went in at a higher value than will be available for a long time. This is a bad economy. I am still buying in with my new money. Maybe my last working years will bear some relationship to dollar cost averages that bubbles never can. In my case I have enough saved to do this and still have quite a sum invested in equities. Perhaps the lady in the story preferred to start retirement will her entire nest egg secured in this market. She has the option to return to the market when she choses. Cash is versatile that way. She might lose a little hypothetical gains but retirement is not about maximizing gains; it is more about maintaining enough principle by adjusting lifestyle. A person who retired in 2000 with the bare minimum savings is in deep doo-doo today if they over invested in equities with no new money going in. They would have been as good or better off in bonds and CD’s with reduced personal spending. I think that anyone reducing their exposure in ’07 was smart (pat my own back) but now it might be too late to get out without quite a loss. On the other hand, if a person cannot afford to see-saw from +30 to -30 they are better off, if only psychologically (most people don’t understand the dollar).

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