Dear fellow Kossacks: can we have a chat?
Okay, it's after 4 p.m. The US stock market has closed. Far from crashing, or closing down over 500 points as so many kossacks had feared over the last couple of days, instead the market hit bottom just shy of (-500) at about 9:45 a.m. and never looked back, closing with a modest (-125) or (-1%) loss.
Despite the dozen or so prophecies of doom diaried here in the last few days, including several on the recommended list, what many people were so sure was going to happen today -- financial armageddon -- never did.
This community has a huge economic cross section of Americans, from poor college kids and graduates, to tradespeople and clerical staff, to professionals and entrepreneurs. Some of us are broke or just have enough to get us through to the next paycheck. Others have substantial investments.
This diary is necessarily directed at the 50% or so of you who have via your 401k plan or private savings made investments. The purpose is not to gloat; rather, it's to suggest to you that today is a great opportunity to examine whether your real risk tolerance is what you thought it was.
As early as this weekend, before Asian and Europe crashed, I was suggesting that today if not last Friday would set a temporary "bottom" in the stock market. This morning, while many people were calling for the stock market to crash, I said:
I'm going to go out on a limb and say that today is likely the (short term) bottom. I anticipate the bottom to be between 9"45 a.m. and 1:30 p.m. I think the loss at 4 p.m. to be less than 3% and a 50/50 chance it is less than 2% (after a major Fed intervention perhaps right at 9:30 a.m.
Okay, so it's nice to be able to pat myself on the back. But please forgive me if I do that, my purpose is to convince you that I know whereof I speak.
What I want to ask you is: how did you feel when you thought the market might be down 10% instead of 1% right now? Would you have pulled your money out of your 401k, or changed into another fund? Would you have been able to sleep tonight? Or would you have been fretting about upcoming bills, or how much longer it would take to pay for your children's college tuition or your own retirement?
Today is an opportunity for you. You got lucky. You got to peer down into the abyss but not fall in. What have your learned about your ability to handle a gut-wrenching decline in your assets?
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UPDATE: A commenter suggested that I add the following comment to the diary, to make my point clearer. It's a good suggestion This diary isn't about market prediction. If anything, it's about how most people including most professionals are mostly wrong about it.
So it is really about you: you being every average American who has a 401k or mutual funds or other investments, deciding what you can and can't handle.
A secretary where I once worked used to crow about how well her stock mutual funds were doing. I asked her, "so, are you cashing any of them in?" "Oh, no, they're up 20%." "Well, what if they fall 25%?" I asked. "Oh, then I'll get out", she said.
So see what she said? She would never cash out a gain (so it would remain on paper) but would always cash out a loss (and so would always make it real).
That's what I hope people will think about with their own retirement, college, etc. assets.
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If you thought you were "a long term investor" determined to ride out any "market volatility", but instead were on pins and needles all day, then now is the time to recognize that maybe you weren't as tolerant of risk as you thought you were. You need to sit down with an advisor (who doesn't get paid to pitch you any particular product) and examine how much you should reduce your risk, by moving to things like short term bonds, TIPS (inflation protected bonds) money markets, or laddered CD's (laddering CDs means you purchase one say every 3 months. You could have 8 or 12 or 20 such CDs rolling over a 2 or 3 or 5 year period). Yes you won't get 10% or 20% return in up years, but you will also sleep soundly after days like today.
If on the other hand today gave you no cause for concern, even if you were expecting a 500 or 1000 decline in the Dow Jones average, then you know that you should stick with your long term plan. There really is something to be said for dollar cost averaging, value averaging, and/or investing in a few diversified index funds (daisycolorado sometimes quotes from Warren Buffet as saying that the average investor should dollar cost average into a stock index and bond index fund, and not even look at them for 20 years).
Finally, we should all wonder why it is that average tradespeople, clerks, truckdrivers and teachers along with everybody else in the middle and working classes should be trying to match or beat the performance of sharp players like Wall Street investment firms, and why our country encourages that as the route to retirement bliss. Our grandparents certainly thought no such thing.
And we should thank our lucky stars that Social Security privatization is dead as a doornail for now.