I am hearing this question these days from those who got out of the
market during the decline/crash/whatever and who are now beating
themselves up for "missing the 50% rise".
My approach is to try to talk them out of re-entering the market -
they already have demonstrated that, despite protestations to the
contrary, they are not long-term investors. This is especially true
for those 50ish and over.
For those under 50ish, who swear they have learned their lesson, we
talk about mutual funds for diversity - no-load, low expense balanced
funds like Target Funds, Wellesley, Wellington, etc.
And for those who adamantly refuse to be swayed, I talk index funds,
particularly large cap index funds to limit the investor to the more
conservative parts of the market (if there is such a thing.) Also,
slow and steady with dollar cost averaging.
Would like to see other's opinions - especially those who disagree.
Also, how about some advice for those of us at the other end of the
spectrum. I got out of the market *before* the downturn, and am now
sitting on almost 100% cash. Ready to retire in a few months (age 63).
Afraid to get into bonds because interest rates are so low.
Morningstar has been doing a series of articles on suggested retirement
portfolios for people with various risk tolerances. Here is their latest
I think the answer to anyone, anytime, who asks "Is it time to re-enter the
stock market?" is "No". Long term investors aren't asking. Neither are the
short term traders. It's only the short term traders who think they are long
term investors who ask.
As a financial planner, you probably have the opportunity to retrain some of
these folks to be real long term investors. You would know how to do that
better than I.
The fact that folks are asking the question is encouraging. It means this rally
has some legs. Let me know when they stop asking and are jumping in with both
feet. There'll be trouble ahead.
The so-called experts are saying conventional wisdom is
bad: buy & hold is bad, asset balancing is bad, yada, yada.
Yet except for a few lucky timers, no one seem to do that
great during the recession. Some huge investment funds
like college endowments did well in the past, but fell flat
on their faces this time.
There's no such thing as a "timer" when one can limit one's losses by
setting up a % trailing stop order on each and every stock one has.
If the stock rebounds, it can always be repurchased.
The problem is that many understood buy & hold as a license to be a
passive investor. This attitude is what has hurt so many portfolios.
And this attitude is bad now and it's always been.
And, no, this is not the time to reenter, unless one's going short.
But one's got to be an active investor to keep an eye on this kind of
transaction, be it options or inverse funds.
If the stock market declined by 50% tomorrow, that convention wisdom
would still be correct. The key word here is "long term". Short timers
always get screwed, boom or bust.
Timing is just as you say, 'lucky'. Not repeatable!
Ignore these experts, there are no experts in the stock market, I only
see wary old men, worried middle aged men and enthusiastic young
Remember the extreme the media can go to, the 'death of equities' in
the 1970s. It's all rubbish, not worth the paper it's printed on. I
think of ben graham's saying when I read these things: in the short
term, the stock exchange is a voting machine, but in the long term, it
is weighting machine.
What do you think the P/E is for the S&P500?
I've seen a low of 20 "adjusted". Over 100, over 700 and over 1900.
If you have almost no earnings for a quarter the number could get very
high. Buying indexes when the P/E is high hasn't been a big
I know what you mean, but I suggest using P/E10 as your ratio, where
you average the earnings for the last ten years for your 'E', you
can't really rely on using P/E except when the market has been normal
for a while, they can be highly subjective.
Looks like a big crash is coming across all asset classes. The tsunami
will be Option ARMs, Commercial Real Estate, and Leveraged Commodity and
Carry Trade. Probably not until early next year as the FED/Treasury
will be propping up the economy on funny money until the moment of
reckoning. I am wondering if money market funds will be safe in this
Also in a period (i.e. years) of continuing write downs it is
unconscionable to use operating earnings for the CNBC talking heads.
Reported Earnings (that include write offs) are the critical measure in
this economy as companies can run out of funding very quickly.
I'm 63 years old and retired and I got (mostly) out of equities (mutual
funds) after Bear Stearns went down but prior to Paulson allowing Lehman
Bros. to fail. So did I time the market? Was it genius or fear? I know
the answer in my own mind, and I'm no genius.
For me, I have recently done my first bit of dollar cost averaging into
Sequoia Fund, FPA Crescent, and T. Rowe Price New America Growth. I had
kept Fairholme and Dodge and Cox Foreign and all my bond funds. So again
I'm no genius and certainly no timer. I just like the managers from what
I've seen and read. But Wellingon and Wellesley are funds I've also been
considering for a long long time and I think highly of them.
Your first point, aimed at people like me, is a very good one. But your
advisees may not want to hear, given that returns on bonds are so low,
and the market is so risky, that they are better off going back to work
(or continuing to work) so that they are not dependent on investments
for their daily living expenses. I myself am like Maynard G. Krebs when
someone uses that 4 letter word w-o-r-k around me ;-)
Why should returns on bonds or bond funds be low .
The interest rate from the FEDs is still low.
As longs as they are low bonds bring good returns.
If inflation comes and the FEDs are forced to up the interst rates than
bonds will suffer.
Use a discount broker to keep commissions down to $ 10 or less.
Buy Exchange Traded funds: Symbols SPY, IWM, EEM, EEB, QQQQ.
Place a trailing stop loss of about 7%.
Get out of anything that drops below its 100-day moving average (which you
can obtain by a chart using Yahoo Finance.
After a bear market ends, buy when SPY etc go above the 100 day moving
Ease in a little at a time by dollar cost averaging. Put a few dollars in
and wait for about a month. If it goes up, buy some more. Keep doing this
each month, but keep the stop loss trailing all the way up, and liquidate
when all your stop losses are executed.
Never average down.
There are many people who have left the market and don't want to
reenter the market with the possibility of delaying their retirement
People have limited places to put their money, bond, CDs, stocks, real
estate, personal homes, and their own businesses. I can't see how
stocks should be out of the picture, particularly for those unable to
manage real estate or their own business.
Funds aren't selective enough on stocks and end up owning those that
are very over-valued. Bonds pay little in interest, and with the large
national debt, inflation is sure to occur.
Large caps are more likely to be over-valued.
Selling covered calls works, but some investors don't have the time to
do the work. High dividend stocks like CLMT might help some people.
Don't take this as a cheap comeback because it might sound like it,
but it isn't, from my perspective:
Volatility = Risk = Return
As the Rothschild's say: "In with the noise of the cannon, out with
the sound of the violin"
Risk always puts a premium on investment dollars.
I don't know a whole lot about American Banks (in UK, I assume you're
in the USA), but HSBC and Barclays are *not* using taxpayers money,
and yet are back in the black, whereas it looks like the other banks
that took taxpayer's money (Royal Bank of Scotland, LBG and Northern
Rock) are all suffering and it looks like they'll continue to suffer
for a considerable time to come.
As far as I can make out, taxpayers money is a poisoned chalice to a
bank. (again, this may be different in America, I'm not particularly
interested in developed countries investment-wise)
I'm an investor in emerging markets, and the way I see it, the west
has had it very good for a long long time, and because of this a major
correction has seemingly turned things upsidedown, but I believe
damage is more psychological than structural. Emerging markets are at
a different level when it comes to volatility (despite being largely
unaffected by the recent downturn), so whereas most western investors
panic like headless chickens at drops of 30-40%, let alone 50%-60%
like the recent downturn, they don't faze us one little bit.
I understand what you're saying about unemployment, rotten car sales
etc, but these are partly manifestations of structural problems with
the American capitalist system (you won't allow some companies to
fail, when I think you should, there is no long term reason for a
government to invest in building 'motorcars' people don't want to
Personally, I don't think you've a very good support system in place
to help people re-allocate to jobs, and that is part of the problem.
That is only a partial fix though, even with perfect job allocation
you'll still have the jobless in a downturn, but like the past
recessions, this is likely to be temporary, not permanent, the
American economy loses jobs fast, but creates them at astonishing
speed. Both of these things are good, it makes you flexible. You only
hear about 400 workers getting let go at an automobile plant. You
don't hear about the small company that hired a new worker, and that
there were 400 of those small companies. The pace of a comeback in the
economy is quite subtle and easily goes unnoticed. In the meantime
everyone believes that things have gone to hell in a handcart.
I believe, that if you put your cash to work, then you'll be helping
yourself and your economy in the long run.
Of course, we don't all have infinite life-spans, so there is that to
I should also add that oil is around $80/barrel because a lot of
people believe the economy is on the way up, remember that the market
reacts ahead of the curve.
The commodity traders may be wrong, I may be wrong about the market,
but rarely have I been this confident about the world economy, it is
clear to me that in the long term the world economy will integrate to
an unprecedented level. Right now world shipping is in hell, tomorrow
they won't be able to make enough of them, such is the invisible hand.
Let's pretend the MSCI World dropped by another 60% tomorrow, then I
can honestly tell you, that if I won the lottery right now (unlikely
as I don't gamble), then after some party expenses, every penny would
go into the stock market. If you're >50 years old, then I can
understand being wary and using (inflation linked) bonds, otherwise if
you've the next 25 - 35 years to play with, you'd be mad not to invest
in the stock market. Any stock market index! (albeit I'd recommend
global diversification in whatever you do, I make no bets on the
future of any one economy, not even the China economy)
Barring World War III, a repeat the Black Death or Alien Invasion,
welcome to the golden age of globalisation, this is the 1900s all over
again. I say: you've seen nothing yet.
Is it time to re-enter the stock market? Hell Yes! You should have
done it months ago. Everybody I know disagrees with me. Which makes me
all the more certain. :)
Instead of getting into the market, I cautiously moved a bit of money
out of stocks. I was about 100% invested last winter and spring, but
in the last month I made some reductions and reduced it to about 75%,
give or take.
The risk of not being invested, of course, is a possibility that the
value of currency could drop more than the value of future dividends
Yes, as in theory/practice this is an indirect form of currency
speculation unless your 25% is carefully divided up between different
major world currencies.
Personally, I'd love it if the J.M.Keynes's idea of the Bancor had
taken off, because then everyone could hold Bancors and know for
certain that they weren't making any assumptions with currency trends
in the future (+ importantly, we wouldn't have to pay fees to make
transactions) A reserve currency sort of fills this role, but not as
effectively as it should. once a upon a time not too long ago, the
worlds reserve currency was UK Sterling. Now it is US dollar, but who
can say how long that will last? Better to index all currencies and
represent them by 1 unit, the single bancor reserve currency, that way
there is no discrimination between currencies.
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