Free Financial Advice

At some point in the future, we’re going to look back at the stock market during this financial crisis. If we take a broad enough view, we’ll see something like this:

If you move your long-term common stock investments into money market accounts (basically cash) now, you’ll probably be doing it at the worst time possible. You’ve already taken the losses. Those are in the past and you can’t go back and sell a month ago. But just because it sucks to lose all that value, isn’t justification for missing out on all the up-side.

Do you think the star should be left of where it is now? That is, do you think we’ll see more losses before a rebound? You may be right. I can’t predict where the bottom is and I doubt you can too. The people who are selling emotionally now aren’t doing so in order to re-buy at the bottom. No, they’ll wait until it’s way back up.

Do you think the slope to the right of the star is too steep? That is, do you think it will take longer to recover than this graph shows? You’re probably right. Yet, it’s still better to sell anywhere to the right of the star.

As Warren Buffet says:

Be fearful when others are greedy. Be greedy when others are fearful.

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11 thoughts on “Free Financial Advice

  1. Your graph supposes an upside. You need to state “You are here” with a ()date ()time component to be accurate. Market is still dropping while the hedge funds cash out.

  2. There are other factors at work here besides just “the ups and downs of the stock market”.

    The stock market is (mostly) being a gauge for the real economy. Yes, there could be an overreaction involved, but the real damage that may be to come would affect the upswing in your prediction. Real damage may be done in terms of bankruptcies and/or share dilution to get through this period that will be a burden over the medium-to-long term horizon.

    The kind of thinking that you are providing, and that Warren Buffet is advocating in that quote, is correct in most cases, but value players are not always right — they are just right on average and in the long run. The future may show that Warren Buffet was way early here, or spot-on in his timing — we won’t know until this looming economic crisis plays out. This downturn may not turn out to be as damaging as feared, and therefore purchasing today would be advantageous, but we can’t know that right now.

    The other thing to keep in mind is that investors are real people that are experiencing real losses in their pensions, savings, home values, and many are put at risk of losing a job. If you are insulated from all this, then, sure, you might take a risk purely on the basis that you think this might be a bottom or not. However, for most of those who have lost 30-50% of their money, their remaining account balances may be down to a critical amount that is essential for survival in retirement (or in the case of a job loss). They may have no choice but to sell their shares at what might turn out to be precisely the wrong moment; it might seem paradoxical, but it would be irresponsible of them to not sell at this time.

    In short, we all should be risk averse and play things safe, but the less you have, the more you have to play it safe. (And the more you have, the more you can “roll the dice” with a percentage of your funds.) I believe that for the most part, selling during/after the current fall is occurring in accounts that had too high a percentage in equities in the first place and are only now reducing to what should have been the correct ratios. Others are pulling out to 100% cash, which would not have been necessary if they weren’t holding nearly 100% stocks previously.

    It’s painful to watch.

  3. Staying in the Market, is predisposing that stocks are being sold and the money is taken “out of play.” If one is continuing to purchase, through a 401K, or similar retirement plan, then one definitely needs to continue to buy. But, if one’s principal amount continues to go down (> 15%-20%), it’s not always a bad idea to pull the money to the sidelines for a while.

    Yes, there is the possibility that it could reverse course and one would miss some gains as they reentered the market; based upon a return of the fundamentals. However, a 10% drop in a stock price requires a 11.1% gain to return to the same level.

    The other part of the equation is somewhat of a commonsense perspective and understanding of the Market as a whole. Typically, (yes, there are those who try to ride the wave) stocks go up when people buy the product of a particular company and stocks go down when people don’t buy. There are other factors (fear), but overall this is what moves the market.

    Given the global slowdown,e.g.. China, there is less construction activity, which means a reduction in commodity materials. Significant job losses indicate that less people able to buy goods or services. Even just an increase in the savings rate translates into less overall buying, which the boomers are beginning to do. Subsequently, profits from certain companies are destined to decrease.

    70% of our economy is consumer based buying; if consumers aren’t buying the economy contracts, the Market goes down.

    The reverse is also true. An increase in jobs being produced, higher salaries, or even credit, has meant more overall buying and companies profit, causing the Market to go up.

    The stock market will go back up as a lot of money is being pumped into the system (read…inflation), but a turn around in the fundamentals has to occur first; employers begin to rehire , and people are able and do buy. As news of these items begin to be reported, then money which is sitting on the sidelines can be shifted back into the stocks of choice.

  4. Way too optimistic, the curve on the right is flatter and will take longer to recover to its start point. It’s a lot harder to put a building back together once you’ve blown it up than building it from scratch the first time. This is a great example of not paying attention and letting things go to far.

  5. These are terrible times. The Great Depression was also disasterous but if you look at the Dow’s historical chart, that bear market is a little blip on an upward slope.

    Don’t even look at your 401ks; of course everything is relative. If you’re close to retirement, you should have been following closely and put your money on the sidelines at the right time.

    In summary, like what Dick says, the market will come back.

    cheers from Paris.

  6. On http://www.financialswami.com we attempt to steer towards the education of financial planning. However, with the financial markets these past 2 years we have been posting anwsers on preservation not creation. That said, here is our input:

    Markets price themselves to future return. That adjustment will probably not match your adjustment. You have the least amount of information. Even if you want to spend the entire day researching an industry, the professionals have already paid 300 peaople to do the same. that is why wallstreet has had the large bonuses for so long.

    Guess what. Its a new era. It’s civil war on the banking industry. They do not know where to lend to make a return with minimal risk. But the hands on professional does. The hands on professional who truely understands his or her business and is willing to work throughout the night to insure sucess of their business will be one of the few to cover their bedt obigations and put in the extra effort to excel while paying back their debt.

    Free markets are not friendly, they just exist. So fail, some prosper, and some don’t realize what is happening around them.

    The world is smaller than most want to acknolege.

    See you next week on http://www.financialswami.com

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