Here is the question of the day: Should I sell my investments?
Now that the Dow has moved down to 9,258 after achieving a high this past 12 months of 14,280 you might feel compelled to sell, because of the stress of losing so much in a short time. But have you really lost much? A good way to consider the downturn is to think in terms of how far back in time we have reset the market prices. The DOW has backed up to about July of 2003. That is further back than normal but not so far back when you consider that the last time the global economy was this crazy was in the 1930’s. Back then the DOW lost nearly 90%. In today’s market that would mean a DOW of 1428 which would take us back to 1985! I don’t think that will happen because of the big differences between then and now, mainly the breadth of the markets and currency as well as advances in financial product design, not to mention a Fed Treasury already in existence.
So now it comes down to what you believe will happen next. First, if you have lost money in this market it is because of bad investment advice. If you ran your own account this is a signal that you didn’t know what you were doing, and if you had an adviser, broker, agent or some other professional, then it is likely he/she did not know what they were doing either, at least they were not letting you know to do any different. Why do you pay them a fee if they don’t know anything? I would contend that since about a year ago this was becoming a possibility and somewhere along the way one of you should have known better, you or your adviser.
At this point, what is wise? You may want to consider the percentage which you could be wrong. What is the likelihood that the markets will spring upward or fall downward from this point? It’s hard to tell but if you think the low of the market could be DOW 8,200 (as an example) and we know the high of 14,280, then we know that we are x number of points from the bottom and Y number of points from the top. You could also reduce the top by some portion of excesses in the market bubble prior to the sell-off. So we could say we are 1,000 points from the bottom and 3,000 points away from the top if we use 12,000 as our top. That being said, we are 3/4 of the way down. That sounds good! And it could be a good way to look at it. There is a problem with this thinking.
The problem is that we can’t tell for sure how much the market has built into the excesses because nobody has the numbers from the bankers. We don’t know the ratio of real money to borrowed money, not really. When you throw in the idea that banks are networked via leverage (borrowing) across the globe, then we could assume that an obscure bank in an obscure country somewhere, like Iceland, could cause a domino effect that takes down more banks and more businesses. We just don’t know. In this case, the example of the low end in the market could be way off, too high or too low. It is easy to get suckered into the basic thought pattern of either selling out completely or buying in completely. In reality it should probably be some percentage either way. If you want out but think you could be wrong, then keep some percentage of the amount you would have in stocks still in the market (25%?) and the same thing in reverse; don’t put it all in at once but maybe go back in with steps and stages of some percentage. In this way you will not be fully exposed when you are wrong.
Volatility is a newer terminology of mainstream media and finance. They used to just say “short-term highs and lows” also known as a “trading range” which is still heard once in a while. The idea of saying Volatility is based on masking the reality that the market is moving up or down, and it implies a finite movement. In this market, volatility as a term, seems almost meaningless. The markets are “dropping” or “crashing” seems to be much more accurate than saying the markets are “volatile” (as if the one saying it has any more information than you do). What they should really be saying is that the markets are dropping rapidly and we are in a Bear Market, and that way you have some idea of what action to take.
Now, what can turn the markets back up again? People purchase what they think they are getting at a good value. When the stocks sink low enough, buyers will step in and start driving prices back up again, or at least stabilize the market. And now we have yet another problem.
This new problem is that we don’t know and cannot tell cearly, what is going on outside the United States. We don’t know the level of credit problems and meltdowns in other countries. We don’t know if their economies can handle this magnitude of downturn. The best thing to do is look for evidenc that the markets are headed up again. I like to use the Investors Business Daily because they seem to have this concept down. Your postion in the market place is up to you, but don’t just react, make a real decision and be prepared to change it if necessary.