Stock Market Advice for a Bumpy Week

I’ve been quiet for some time because there hasn’t been much to write about. But after yesterday’s stock market rout, why not chime in? What’s worse is that as I write this the futures are predicting another rout – but we have a big employment number coming and time will tell how today plays out. Anyway, what’s a little rout after the 5 year run stocks have had. Here are a few thoughts to go with your morning paper, or more likely iPad news:

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1) The drumbeat of guru’s recently telling you that, “while some areas of the market are frothy and it might be time for a “slight” pullback, a year from now you’ll be richly rewarded” is overwhelming. Of course, knowing my cynicism, what would you expect from people who make their living from fees related to you keeping your money in their funds? Now I’m not going to tell you what the markets will do – I’ll leave that to guessers – but, as usual I will state what’s obvious and true – To think that the stock market will repeat the type of moves seen in the last 5 years in the next 5 year is almost silly. Yet that’s what most people are saying with their money when they have a larger percentage of their assets in the market, merely from the fact of that rise in the market. By not decreasing that percentage they are subjecting themselves to more stock market fluctuations.

2) Along with that there have been many advisors who have been saying that your returns in the future will be smaller, but still better than the alternatives. That may be true and it may not be true, because no one knows, but the fact is that the stock market is a higher risk investment capable of large moves up and down. After a large move up the odds of prolonged underperformance or a fall are greater, whether it happens or not. My advice is not to put huge amounts of money at risk in a vehicle when you are looking to get a 5% return, but which is capable of dropping 20-30%. That’s gambling. Reducing exposure after you have been “lucky” is prudent.

3) Of all the worries in the world, and all the stuff being bantered around concerning your money, what should you be afraid of and watch most closely?

 a) Gaza – not a worry. While a tragedy it is not a financial mess. As a matter of fact Gaza has the potential to be a positive for the market once it is over.

 b) Ukraine – not really a problem. Again the financial impact is small. It’s a worry, but not a financial one.

 c) Russia – now we are getting somewhere. Financial sanctions are no less than a war without troops. Who knows what their reaction will be. If they impose sanctions themselves, and Europe takes a harder stand, we can ratchet up the problem. Many people believe that the Great Depression was caused by a tariff war.

d) The market rise itself. The seeds of any decline are sown by a previous rise. For example, look at oil. A boom in prices causes an increase in drilling which produces more oil. Eventually that increase produces a glut which causes prices to fall. So the fact that those in the market have made so much makes them nervous about losing those gains. If those gains start to evaporate, it can lead to a snowball effect or panic. This is not a rational effect but an emotional one – and a real one. It’s why I constantly question all those rational gurus analyzing the market. They are missing what moves markets and it’s often not related to economic facts. There’s an old saying that the market had called nine of the last five recessions--In other words, no rhyme or reason. The crash of 1987 was a 30% drop – 22% in one day. There was never a recession around it.

There are others considerations, but these should get you thinking.
Enough for now.