Investing Now Is a Darwinian Struggle
11/13/2008 1:00 pm EST
That appeared to be the top priority of many investors I spoke with last week at the Washington, DC Money Show.
And after the two months we just had, who can blame them?
The Dow Jones Industrial Average is down 27% since August 31st, the Standard & Poor's 500 index has plummeted 30%, and other domestic indexes have suffered even more.
And don't even mention overseas bourses, otherwise dubbed "the place hard-earned money goes to die." However bad it is here, it's even worse in once-stellar performers like China, Brazil, Germany, and Russia—and a rising dollar has only compounded the pain.
Investors are in a crisis, and unlike at previous Money Shows I saw little appetite for the latest hot stock or double-inverse ETF that would bring overnight riches. People now have the burden-and that's what it is at times like this—of managing their own investments, and they take it very seriously. No more fun and games.
And in a treacherous market like this one, even many advisors consider themselves to be ahead of the game if their portfolios are down 20% instead of 40%. Of course, that's not good enough for professional fund managers, who have been hit by waves of customer redemptions: People have pulled a record $126 billion out of mutual funds in September and October.
And investors themselves are clearly uncomfortable with the sophisticated bear-market trading strategies some advisors recommended. Busy people with demanding jobs and family responsibilities simply don't have the time to master these convoluted investing regimes. Wasn't it this kind of complexity that got us into so much trouble in the first place?
That's why attendees at a workshop I gave on retirement planning and at the MSN Money Strategy Lab panel in which I participated were asking the most fundamental questions.
How long will this bear market last? How much lower will it go? How should I invest now? I'm less than ten years from retirement—can I make up the ground I've lost? When should I get back into stocks? Or should I go back into the market at all?
During the Strategy Lab panel I shared some basic tips I thought would help. Here they are.
First, don't try to time the market or call a bottom. Many have tried and many have failed, including some pros with estimable track records. It's a fruitless task in a market is that has so many "x" factors—the continuing financial crisis, a deepening recession, growing numbers of foreclosures, a new administration in Washington, DC, and a global economy.
For people who can tolerate more risk or have more time ahead of them, this might not be a bad time to put some money to work. But I'd invest a little at a time, maybe a small amount each month for the next year. And understand that stocks could go a lot lower still.
If you're an active investor, go with what's working. These days, that's generally short and currency ETFs, US Treasury bonds, and a handful of stocks. Everything else is going down, down, down. With the fundamentals so bad, valuation doesn't matter. With the technicals so weak, charts don't matter. Almost the only thing that does matter is momentum, and active investors (like those following the style I've adopted in Strategy Lab) need to pounce on the few places in this market where there are signs of life.
Also, limit your risk and cut your losses quickly. Smart, successful traders know this, but active investors are just learning. In such a volatile market, you can blow through stop-loss points (typically 10% to 15% below where you bought a stock or ETF) in a day, but that doesn't mean not to use them. The down side can be a lot, lot lower.
As you know, I advise people to keep 80% to 90% of their assets in a broadly diversified portfolio with exposure to domestic and international stocks, bonds, commodities, real estate, and cash. You can invest actively with the rest, if you'd like. Only diversification or dumb luck has spared people from the very worst of this bear market.
For most people, the only way to handle a hundred-year flood like this is to stick to the basics: invest regularly through dollar-cost averaging, reinvest dividends, and rebalance your portfolio at least annually to hit your target asset allocation. You probably haven't hit any home runs this way, but you may be doing better than many advisors who loudly proclaim that "buy and hold is dead."
Along with that, I would gradually position yourself for the recovery. That means paying attention to economic and technical data and maybe stepping up investing as the economy bottoms out and the markets recover.
And finally, keep lots of cash on hand. That will give you the ammunition to invest more as the market recovers and will also cushion you against the unforeseen impacts of the bear market and recession. Paying off credit card debt and amassing an emergency fund that covers six to 12 months of expenses is vital.
One thing's for sure: These are not panaceas. They may not keep you from losing money. Heck, they haven't kept me from losing money. I'm investing for retirement and college just like you are. I hate losing money as much as you do, and I, too, worry that I've fallen behind. I've made some mistakes, for which I'm still kicking myself. And my so-called "knowledge" and education have given me as much protection in this market as a tin shack in a tsunami.
Because as Humphrey Bogart told Ingrid Bergman in Casablanca, "the problems of three little people don't amount to a hill of beans in this crazy world." Some things are just bigger than any of us, and all we can do is—the best we can. Sometimes that's not enough, but it's all we've got. Oh, yes, and luck and prayer. And to repeat myself, diversification.
So, keep your heads down and your spirits up. Here's looking at you, kid.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow or MoneyShow.com.