What happens when markets suffer a panic?
Well, a lot of things: investors deal with emotional outbursts, a frenzy of talking heads, and lots of really bad advice. At the same time, these dislocations create opportunity — if you manage to keep your wits about you.
From an interesting article in the WSJ this week, comes this modified list.
1. Invest during a panic: When panic hits the front pages, put a toe in the water.
2. Don’t speculate: Look for securities that offer modest, but predictable gains. Think Warren Buffett, not Steve Cohen.
3. Don’t make too many bets: Feel free to sit most hands out. You should only place your bet when you really like the odds. You can be diversified without owning every asset class.
4. Be very wary of any boom: Remember, Price matters. Avoid buying tinto the hockey stick part of a surge — that’s way late in the cycle. If you are early into a sector, you should sell off 10% into each quarterly surge.
5. Don’t put too much weight on expert financial analysis: Learn to become a self-sufficient investor. We have seen too many examples of where most Economists got the big picture way wrong, and when analysts were compromised by their firms.
6. Do you really need to pick individual stocks? Most people suck at stock picking. Givent he universe of ETFs, you have a lot of options without the indiviudal stock risk.
7. Invest in stages: 99% of people will not pick the bottom; even less get out right at the top. Use dollar cost monthly averaging with indexes, and invest over time.
8. Only invest for the long-term: That means five years or more. On rare occasions, it means 10-15 years. Daily moves are noise; focus on the signal.
9. Consider a really good active fund manager: They do exist, but they are rare. Look for mutual funds where the manager has a terrific long term record — ideally 10 years or more.
10. Everything has risk — even cash: Try thinking about what inflation is going to do to you if you sit in cash on the sidelines. There are, literally, no risk-free places to hold money.
A few caveats to the above:
a) Your own retirement timeline is very important. If you are 10 years or less from retirement, you need to be more conservative.
b) Know thyself. If you cannot deal with being underwater,then you must adjust accordingly. Long term is really very long term. That may mean patiently waiting for a decade or so — think Japan in the 1990s, or the US from 1966 to 1982.
c) Inflation is pernicious, always present — even when its less than 2%.
d) The time you have to manage your assets will determine how active you can be. Dollar cost averaging requires the leastamount if time and effort.
e) Simpler is better.
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Source:
Opportunity in Credit Crisis
BRETT ARENDS
WSJ, March 19, 2008
http://online.wsj.com/article/SB120587859011946567.html
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Good Post, Barry.
Thanks for being out there during these turbulent and potentially historic times.
I am having real problems with #8 and #9 these days. Just ask many who have plowed two much of their savings and retirement into the markets. I say too much because they have lost so much over the past few years. And they’re sitting with weak cash on hand positions.
I agree with your comment about long term.
If you have that list for #9, please put it up. I’ll probably cross a few of the names off of that list, too.
As they say, this isn’t your father’s Oldsmobile. Well, this isn’t your father’s banker, stock broker, or mutual fund manager either. If you think it is, try to get a good unsecured line of credit right now. Something over $20K or $50K. Not likely to happen.
Long term? Forget it. The rules have changed.
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BR: Hence, caveats “a)” & “b)”
Good advice!
Question: Does the fact that the FED has established the discount window, lower FED Funds, etc., negate the possibility of “deflation?” If so doesn’t that take away the counter-inflationary force that so many “deflation hawks” were counting on to stemm INFLATION? Down the road I see big time doom and gloom no matter what the pundits are saying. You can’t have an economy, which by all accounts lacks any meaningful savings rate, which is the basis for true capital accumulation, have any sustainable recovery without first flushing out the excesses. It is pure madness what they are doing!!!
I truly consider myself one of the less knowledgable, people on this board, so please any of my fellow posters, feel free to point out the areas of my discourse where I am incorrect and educate me. (and perhaps a few others.) Thanks ahead of time.
I would say now is not a good time to invest long in the market. In the past 3 months 2 of my neighbors have put their houses up for sale and have the left the area. I don’t know why I just know I keep seeing more and more houses come on the market.
The problem is also starting to spread across the globe.
http://www.bloomberg.com/apps/news?pid=20601081&sid=ahITq7938yNU&refer=australia
If you think the housing problem is just in the USA and UK you are dead wrong, it is everywhere. Housing prices have gone up at an even more alarming rate in Asia.
The Fed is going to have to lower less than 1% by the end of this year I would think. This should help people / businesses pay off debt and keep the economy from receeding on an extreme. But this is going to take many years to fix.
Our US economy stayed good for many years because of housing and also by building up Asia. Now that housing is built to an extreme and Asia is built we are done for now and that’s why jobs are disappearing.
AMAT didn’t move from semicondutor and display tools to solar overnight for no reason. You can only build semiconductor and display factories once and they are good for ten years.
I disagree with the 8) on the WSJ list that long term is five years. Stocks have gone no where under Bush; under Bush, “boring” Treasuries have out-performed major US equities. That’s nearly eight years. GE is under where it was at the turn of the century including dividends. If you factor in the loss in the dollar, much more.
Stocks are ONLY for investors looking out ten years, realistically twenty-plus.
There is only one way to be sure you keep up over twenty years and that’s indices, the cheaper the better. The best stock for the last few generations was Philip Morris, the second best a milk bottle company they bought. Who woulda knowed dat? No one.
The optimal way to do that is to allocate your equities to total global stock market indices using ETF’s tax efficient wrapper.
There are old investors and there are bold investors but, there are no old, bold investors with money.
“Stocks have gone no where under Bush”
Stocks aren’t under Bush. If you can’t get past Bush derangement syndrome you are going nowhere.
Had you invested in materials or energy or mining stocks through ETFs or mutual funds in the last eight years and just held them, you would have done well.
You could invest in those sectors now and when Bush leaves office you can watch them continue to do well and say, “Look how much better things are with Bush gone.” Sheesh.
conveniently ignoring #4, say I used #6,7,8, and invested in the Nikkei in December 1989 at ~39,000, and dollar cost averaged in for the next 19 years…I am massively down. Long-term is an excuse for bad trades and bad investments.
If you play heads or tails long enough, any losses will come back…doesn’t mean you should keep playing to win your money back.
#1. “Invest during a panic” is good advice…when your stomach is churning with the thought of getting long in a market that is falling apart, that’s usually the time to get in.
#5 “5. Don’t put too much weight on expert financial analysis” also good…I can’t remember who said it, but one of the things I like to tell newbies to the markets is “Nobody knows nuthin'”. Gotta make your own mind up
The Fed announced a second class of non-bank
entities allowed to shop at the credit-window:
Porn and Casinos,
(and for the kinder-care, Video Games)
As the three fastest-growing segments of
the American economy, the Fed felt these
were entitled to feast at the trough too.
No more Bread and Circuses, that’s so O.S.
Porn and Casinos,
(and for the kinder-care, Video Games)
That just proves the government has things backwards. They are supposed to go from the penthouse to the outhouse…..NOT the other way around!
2. Don’t speculate: Look for securities that offer modest, but predictable gains. Think Warren Buffett, not Steve Cohen.
10. Everything has risk — even cash: Try thinking about what inflation is going to do to you if you sit in cash on the sidelines. There are, literally, no risk-free places to hold money.
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A dilemma.
Participation requires speculation. So, it’s not a matter of speculation, it’s a matter of risk.
We are forced to speculate if we want to stay even (gains being a matter of semantics in a fiat universe).
Barry, this post makes too much sense to attract traffic to your blog, which is likely your reasoning in posting it on an Easter Sunday morning…
It would be interesting to see what kind of reaction you would get from readers if you posted something promoting the logic of long-term investing during the middle of a volatile trading day…
I would venture to guess the reaction would be something similar to the that of rabid sports fans if the weather service interrupted a “March Madness” basketball game to warn people of a tornado…
Great post, though…
Last year’s really good active fund manager is this year’s complete idiot. (and not vice-versa)
Replace #9 “Consider a really good active fund manager”
with =>
Get out of debt. Carry only one credit card and show the balance as zero once a month.
Rake 6 months living expenses into a pile and top it off as needed to compensate for inflation.
Give generously and buy local with cash instruments.
Unless you are an expert trader, dollar cost average into low fee funds or ETFs like a blind, dumb mule. (Don’t even think about derivatives. Never borrow to buy equities.)
Do this for the rest of your life.
Disclaimer: You could still get hurt (people who never smoked can get lung cancer), but you weren’t a fool.
I like the method presented in this paper for “simple is better”
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
“Stocks aren’t under Bush. If you can’t get past Bush derangement syndrome you are going nowhere.”
I believe his point was that US Stock Market typically do much better with democratic presidents than republican presidents, and the US economic performance while Bush has been president is the worse than even Jimmie Carter.
Many of things you suggest to invest in are NOT available to many people in a 401K.
I don’t really like the list myself. If you interpret #8 to simply mean don’t be a day trader and attempt to make your money in perceived changes of value, than sure it is agreeable. If they mean don’t keep score since even the slowest runner finishes given enough time, then no. Ten years is a long time. We could have 3 presidents within that time. Imagine if Jack Welch would have said the same thing about hiring and firing managers. The short term is the greatest predictor of the long term. If the investment lags the first 6 months, most likely it will continue to lag.
Dollar cost averaging will always be with us. The thing is it won’t change a marginal investment into a good investment. It won’t even change a good investment into a marginal investment. It is kind of like negotiating the last $100 in a car deal: it won’t really make a difference, but it makes a lot of people feel better. The one saving grace of dollar cost averaging is that it can keep you from losing a lot of money up front if you valued a stock wrong. In other words, this is another version of if you don’t keep score you win, not that you should set yourself up to feel significant pain with every loss.