I consider that new theory to be unlikely to be validated over the long term. The two markets are very, very different, as are the economies/politics of the two countries (China and the US). For one thing, the economic statistics of China are whatever the Chinese government decides they need to be. It is putting it mildly to say their economy is an unwieldy beast of government fiat, political corruption, potential economic catastrophe, and capitalism without safeguards or ethics.
Although I do consider the recent US summer rally to be a (profitable) "dead cat bounce", and third/fourth quarter 2009 earnings will disappoint, an L-shaped recovery as seems to be forming, is much better than a V-shape bubble.
Actually, I'd love to see another 200-pt decline in the S&P 500, although I think it's doubtful. I've got a third of the portfolio in cash after taking recent profits, and would love to jump back in to snag a big chunk of depressed fund prices.
A lot depends on whether you can overcome bad instinct. The market overreacts because people overreact - whether on the good upswing or the bad downslide.
Technology has exacerbated swings in the markets. Pros and sophisticated amateurs use puts and call options to computerize their trades. If your only investments are 401k accounts, you've got a 24-72 hour lag before any trade can be executed. You have to have a different outlook and methodology.
I NEVER would predict when an upswing or downslide is going to happen. I don't have access to such analytical tools. That's for pros, and we're on our own even though I read and research a lot (it's an interest, not a necessity). It might take days, weeks, months, or years - but that up markets will fall and down markets will rise, is a fact of life.
The one stat that holds true is that if you panic and try to time yourself in and out of the market, you will lose. If you have missed the selling signals and the market falls drastically, your best bet is to hold on because the sharpest rises, regardless of what the medium- and long-term trends are, always happen very soon after the 'bottom'. But we can only see that after it occurs! So holding on and not panicking is the one rule that will always help you recover - at least somewhat - from the mistake of not selling at the top.
For instance, I thought about sellling back in September and didn't. Obviously, big mistake, to the tune of a 48% drop. This was the same as experienced by a couple we know, let's call them Dave and Jane. Dave and I reacted differently to the March 2009 S&P500 close at 666. He panicked, yanked his money, cemented his capital losses, and threw it all into CDs.
I changed nothing in March. In early July I did a mild re-balance of the portfolio. 5 weeks later when I looked at it the surprise market rally had gained our portfolio a 26% return. 2 more weeks later, our 48% loss was trimmed to a more modest 17% Y2Y loss.
At that time I took profits and for the first time ever, have less than 50% in equities. This is highly unusual for us, but these are chaotic times. Someday when the signs look right (which pretty much means when everybody's running around claiming the sky is once again, about to fall on our heads) I will move back into equities. I can do this because our portfolio is actually only a modest part of our overall financial planning, so we're more aggressive than most people our age.
Because inflation is low, being in cash isn't costing you anything. Hopefully your bond fund managers are intelligent and have been able to secure big positions in the corporate bond market, where 7% and 6% returns are available. But a Treasury bond fund isn't much better than cash, by comparison, although TIPS are a good addition to anyone's portfolio. But sooner or later you have to get back into equities - and risk - in order to generate above-average returns.
Unless you have a crystal ball, that 'when to get in' is the big "gotcha"! If I were being conservative, I'd dollar cost average back into equities - say, $5K every month (or less, I used an arbitrary figure). Especially if the markets rise slowly over time, wiggling up and down in a certain range, this works to your advantage yet doesn't upset the emotional need to feel secure about having enough cash on hand.
I don't think the market is coming back in 3-5 years. This is a very different market. Caused by a different problem. Our government is inflating our currency as fast as possible to hide the fact that they are bankrupt. You can play it safe and put money in money market funds or Treasurys, but that may be the most inflation vunerable spot. The dollar is dying. Stay away from dollar denominated investments. Buy commodities. If you want to at least triple your money - play it really safe and buy silver and wait 5 years. Our government is making it easy and clear. Take any bet against the dollar. The best move is to borrow today's dollars to buy commodities.
>>I don't think the market is coming back in 3-5 years.>>
Look, the market is simply whatever it is, on any given day. The market today is different than the market of 2000, which was different than the market of 1990, and again different than the market of 1980....ad infinitum. Ever looked at the many different companies that have come and gone in the S&P 500 over the last 30 years? There's almost no resemblance between the two lists.
Bush/Cheney created deficit spending and a weak dollar during his administration, gutting the surplus and balanced budget he had been gifted with by the Clinton administration. Deliberate relaxation of the SEC regulations led to Bush’s pals making a fortune off everyone. The crash hit all asset classes (unlike previous recessions), creating a very real risk of deflation.
Japan has struggled with deflation for 20 yrs; and it has not been a pretty picture for their middle class. Do deficits matter? Of course they do – but a deflationary economy raises the spectre of not only rising deficits but an economy that can’t grow its way out of the downward spiral. It’s now acknowledged that the Great Depression would never have lasted so long if the US hadn’t applied the brakes too abruptly by starting to raise interest rates too soon.
Buy silver? You mean the metal that was $5/oz during the 1970’s, spiked to $49/oz in 1980, then collapsed again and is now in the $17 range? You’re saying this is ***safer*** than equities?!?
Hmm, let’s compare it to the S&P500, which ended 1980 at the level of 300. Looking at it over the intervening 29 yrs, we have seen ups and downs, but currently the level has been around the 1080 mark for some time. An investment in an S&P500 index fund would have more than tripled, compared to a loss invested in silver. Even gold in this 29 yr period would not even have made a doubled ROI, let alone tripling.
And it’s easier (and often cheaper) to take profits out of equities and park them someplace else as you rotate in and out of different investing sectors.
If you want to bet against the dollar, nothing could be simpler. Invest in large cap stocks (or funds) with the majority of their earnings overseas, along with a good international fund (or even two). The weak dollar will work in your favor – we did this in 2006 for a 26% gain in that sector of our portfolio. Then we got out before the dollar strengthened. We are currently back in those sectors again, with a reduced but still moderate-sized equity position.
First you have to see inflation start up, before adjusting your portfolio to account for it. If you want a ‘set and forget’ portfolio, then find a good balanced fund and let the portfolio mgr take care of the adjustments. I prefer to balance our portfolio myself through diversification, and will remain overweight in bonds (19% aggregate return so far in 2009) until the Fed begins raising rates. At that point I’ll start shifting out of bonds, the speed depending on what the economic factors are at that future date. Alternatively, if equities collapse again, I’ll start dollar-cost averaging back in, using a good portion of the portfolio.
I’m not saying that commodities should be ignored. One should always remain diversified, for the simple reason that different market sectors lead at different times. Over the last 20 years specifically, an investor would have made more in bonds than in the equities. In commodities and currencies, you would have had to guess very specific, relatively short periods to have gained real profit. But over any full 30 year period, regardless of starting date, going back over the complete history of the stock market since 1929, equities return a higher ROI than any other investment.
I actually do believe the price of gold will rise – but when it falls, it falls hard. My crystal ball isn’t good enough to forecast when foreign governments are going to start selling their gold because of their own economic catastrophes, as when the Soviet Union broke up in 1991 and had to dump its gold reserves, or the 1997 Asian economic crisis that caused those countries to be forced to sell their gold. A government buys in big quantities, such as India’s recent purchase of gold (and China will eventually follow suit, as their gold reserves are only 2% of their surplus). But they also sell in huge quantities, which inevitably depresses the market.
BTW, Gold Bugs might find the following data interesting: the price of gold did NOT rise through the Great Depression years. It averaged $22, even dipping briefly down to $17 in 1931. By 1933 it crept to $34.50, where the price remained for the next 38 years.
I agree with much of what you say. But
>Buy silver? You mean the metal that was $5/oz during the 1970’s, spiked to $49/oz in 1980, then collapsed >again and is now in the $17 range? You’re saying this is ***safer*** than equities?!?
Yes. There is no counterparty risk and the asset is extremely undervalued. With equities you have to find one that will make money long term. Our government has inflated away our savings. Our high income manufacturing jobs have gone offshore. There aren't many consumers able to drive our economy higher. And a good international fund won't protect you from a devalued dollar. Most European governments are forced to inflate their currency just like the US. Maybe an international fund in countries with a solid currency.
>BTW, Gold Bugs might find the following data interesting: the price of gold did NOT rise through the Great >Depression years. It averaged $22, even dipping briefly down to $17 in 1931. By 1933 it crept to $34.50, where >the price remained for the next 38 years.
Back then we were still on the gold standard. You could trade in dollars for gold. It's a different world now. Nixon fixed that in 1971. Given the choice between gold or dollars. I'd take gold. It can't go to zero.
You're right about knowing when to get out is difficult. And if you get out at the right time, where do you go?
No, actually we had been off the gold standard since buying gold was banned in 1933 in the US. The difference in 1971 was that Nixon refused to exchange foreign reserves for gold instead of dollars, forcing all major currencies to finally enter the 20th century and 'float' against one another.
The issue is not, in my eyes, one of "this asset isn't going to to zero". The issue is, over the last thirty years would I have been better off in commodities, bonds, or stocks? The answer is, I have been better off in stocks. This year, it has been more mixed - my equity funds have shown a 54% gain, bond funds gained a rare double-digit 18%.
As all our retirement funds are still in 457/401, I have little interest in asset classes I can't invest in right now. But going forward when we transfer funds into IRAs, I have no objection to diversifying into a modest percentage in broad-based commodity and emerging market ETFs, especially Brazil where I have friends who keep me apprised of 'everyday' popular sentiment.
But I don't place all my eggs in any one basket, ever - nor am I interested in what is 'hot' at the moment. By the time the mainstream media starts trumpeting it and the average Joe takes notice, the smart money has already been made.
Over 25 yrs I have gained a more-than-decent ROI. Even my MIL's professional advisor firm agrees I do an extremely good job on managing our portfolio and have good investing instincts. You have your method of investing, and clearly mine is different. There is no real right or wrong here, whatever works for you is what's right...for you, not necessarily for anyone else.
Most people are the 'set and forget' types of investors. Commodities are not RE, and I don't happen to believe they are appropriate for amateurs who don't know what they're doing and have no real interest in learning the intricacies of such volatile investments.
As inflation has been virtually zero for over a year, I have no idea why you think your savings have deflated in value. I repeat, value is EXACTLY what it is, at any given moment. The question is, where is value going to RISE next? And on the contrary, a good international fund will, in fact, gain from a devalued dollar as long as earnings are in Euros or non-dollar-denominated currencies. At least one-third of our 2006 gain in International came from currency fluctuation, by my estimate.
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