|Whatís a person to do in todayís stock market?
November 28, 2008
What should a person do in todayís stock market?
With this bear market here are some new stock market terms:
- Standard and Poor: Your life in a nutshell.
- Market correction: The day after you buy stocks.
- Institutional Investor: Past year investor who is now locked in a
- Cash Flow: The movement your money makes as it flushes down the toilet
- P/E Ratio: The percentage of stock market investors wetting their
pants as the market keeps crashing
As my first Money Marathon column, I have chosen the timely topic of
the stock market. What should a person expect from here and what
should he do to protect himself?
First letís look at what has happened. As of the close of business on
Nov. 20, (what I hope was the low) the market as measured by the
Standard and Poorís 500 index was down 48 percent for the year and 52
percent from its high in October of last year. To put this in perspective, since 1942 there have only been two bear markets nearly
this severe, a 48 percent drop in 1973-74, and a 49 percent drop in
2000-2002 Since we now have had two terrible bear markets in this
decade the market as measured by the S&P 500 as of the low was down
for this decade 38 percent. Only one other decade from the 20s forward
has been down for the entire decade and that was the 30s in which the
market was down only .1 percent compounded for the entire decade. At
that low point of the close of business Thursday Nov. 20, eight years
into this decade the market was down at a compounded rate of (5 percent). From that day forward the market would have to compound at
27 percent a year for the next two years to be flat for the decade.
Since I stared in banking in 1974, I have never seen any thing this
bad in the stock market. The bear market from 00-02 was nothing like
this, in that if a person didnít own tech stocks during that period,
his return was basically flat, which was not bad. In this bear market
there has been no place to hide and the market has taken no prisoners. I wish I had seen this
coming a year ago, but I didnít.
In normal times I would say that a nearly 50 percent decline would be
a terrific, once in a lifetime buying opportunity and again maybe this
is the case. But this might not be normal. In fact it has been down
right scary. When I first started writing this article I thought there
was a small chance that the economy, confidence and the market could
spiral downward out of control-maybe a 5-10 percent chance. After the
Federal Reserve and the Treasury made decisive moves last week to save
Citigroup, buy mortgages and become very aggressive at providing
liquidity I think it is much less likely of a downward spiral but
What should a person do to in this market?
First, a person should examine how much he has in stocks as a percent
of his overall investments (this is called asset allocation). The rule
of thumb has been to subtract a personís age from 120 to determine how
much of a personís portfolio should be invested in stocks. As an
example, under this scenario, a 50 year old should have 70 percent in
stocks (120-50) and a 20 year old should have 100 percent in stocks
(120-20). In this market to implement this rule, I would use a more
conservative rule of thumb of 100 rather than 120 which would lower
the stock allocation in my two examples by 20 percent, to 50 percent
for the 50 year old and 80 percent for the 20 year old. Rather than
owning individual stocks, I would also suggest owning well diversified
high quality stock funds (funds that purchase big companies that are
less likely to go broke.)
Secondly, if a person has a sizeable amount or large percentage in
stocks and a further significant loss of that current amount of money
could be ruin his financial future; I would consider developing a plan
to protect against a market collapse, possibly selling stocks to put
into cash investments at incremental levels as the market goes down.
This protects against disaster.
A very possible scenario I think is for the market to bounce around
going higher by 10 to 20 percent and then coming back down to current
lows and doing this several times over the next several months. This
seems to be what happened last week with a five day upward movement
and then a big sell of Monday. If the economy doesnít recover until
2010, which is a possibility then a person can potentially make some
money by selling part of his portfolio, say 10 percent on a 10 percent
up move in stocks. Then if the market drops back down to its previous
level, a person could put half of those funds withdrawn back in the
market and repeat this as many times as it occurs until the market
breaks out on the upside for the next bull market.
If a person has not invested in stocks before, has only a small amount
invested or is prepared to take some risk, this could be a great time
to invest for the long term and again this is the most likely the
current situation.. But again, if a person has a lot invested, be
prepared to protect against that small chance that this is a once in a
century bear market that could continue downward as described above.
Hopefully, Standard and Poor can become again a term of a way to
participate in the growth of the American economy and the upswing for
the next bull market.
(Remember every investorís situation is unique and it is important to
review your specific situation with a financial professional.)