Monday, October 13, 2008

What Are Your Options Now?

Last month we could take some solace comparing the current bear market to past recessions. Last week, though, was the worst week ever for stocks, dropping 22% over eight trading days. The market is down 36% YTD and the Dow is back where it was in 1998. Even though this recent drop is due to irrational panic, is it time to switch gears?

Before outlining your options, it is still important to keep some historical and global perspective. So far there have been steeper market declines during the 1972-1974 recession and during the 2000-2002 dot-com bust. We are not on the brink of another Great Depression, when the market lost 93% from 1929-1932. Unlike the past, this market cycle is global and the markets in Japan, Britain, Germany, Australia, Hong Kong, India, China and France are all down well over 40%.

Here are your basic options, followed by our commentary:

1) Buy more stocks all at once

2) Buy more little by little (dollar-cost-average)

3) Hold everything to see what happens

4) Hold market position but review and reallocate investments

5) Sell some/all stocks for now and keep in cash, or buy bonds

6) Sell everything and put it in gold or under the mattress.

1) If you are a Gambler, you could take extra cash, or take out a home-equity loan (now offered at 3.99% through Schwab), and put it in the market as fast as you can. This is basically ‘market-timing’ which is always a mistake in the long run, but gives you bragging rights if you are correct (otherwise don’t tell anyone). If you are driven to do this, only do it with a small amount of money (5% or less of your portfolio) and don’t sell your bond ladder to get the cash.

2) Taking extra cash, or using your current 401k contributions, to dollar-cost-average into the market is actually the best option. If you are young enough this is a once-in-a-lifetime opportunity to provide for your retirement so you won’t even need to worry about Social Security (which you may not get anyway).

3) If you are retired, or need some cash flow from your portfolio, holding on to what you have provides peace of mind (assuming you have a balanced portfolio with a 15 year bond ladder with Stripped Treasuries). It is tragic to see how many people are letting money ruin their lives now by watching the news all the time, talking to everybody about how awful it is, mired in angst about whether they should buy or what they should sell. In the long view this will have as much impact on your life as last year’s Super Bowl.

4) Hold but review and reallocate as needed is a great idea. Of course you pay us to help you with this strategy. so we are biased toward this option. We have let you know when major shifts are called for (e.g. sell muni bonds) and can help you execute these changes. We are now reviewing our current portfolio holdings to see if there are better money managers in various asset classes, and will advise you as appropriate. If you are feeling very anxious, it may be a subtle psychological clue that you should have a lower risk portfolio due to endogenous changes in your life (e.g. employment, health, business/real estate risk). If this fits you, please call us to see if your portfolio should be reallocated.

5) Sell! Put it in the bank or buy bonds. This is folly because you are letting your emotions dictate your investments. This is one of the stupid things some smart people are doing with their money. Not only do you have to decide when to sell, but also when do get back in to the market. So you live out the next couple of years on the edge of your seat watching the market. When it goes up, you jump back in, but then get whipsawed as it drops again. So you sell and take your loss. On the next uptick, you lie awake every night wondering if you should buy this time. Get a life!

6) Sell everything and buy gold or put it under your mattress. This is one of the stupid things that stupid people do with money. Sure, keep some cash or gold within reach (not more than 2% of your portfolio) to hedge against financial Armageddon if that is comforting, but it is not an investment strategy.

We hope this outline of your basic investment options will strike a chord with you, and confirm that you are on the right course for your particular situation. If it is unsettling, please email us so we can set up a time to discuss further.

PS The Cambridge strategy of using the 15 year Treasury bond ladder is impacting the industry. See this Oct. issue of Money Magazine:

© Bert Whitehead 2008

Bert Whitehead, MBA, JD

No comments: