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I Think We’re Seeing Stock Market Capitulation (This is Good News!)
By JLP | December 23, 2008
From yesterday’s Wall Street Journal [empasis mine]:
Harris Cohen, a 25-year-old project manager with Amtrak in Washington, D.C., opened an individual retirement account in 2001, when he was 18, and filled it with stocks he thought had a bright future, including Apple Inc. and Garmin Ltd. He bought mutual funds that invest in alternative energy companies and utilities. He didn’t bother with bonds.
“I had a real good track record over five or six years, with increases from 10% to 20% a year,” Mr. Cohen says. His portfolio has fallen about 40% over the past 18 months, he says.
In September, he began pulling back from stocks. Now, he has shifted his retirement savings to corporate bonds, a money-market fund and a few utility funds. He says he doubts he ever will view stocks the same way. “Even if the market were to rebound and the economy were to improve, I would be very loath to invest entirely in stocks,” Mr. Cohen says.
For a 25-year old to have his entire retirement savings in corporate bonds, money market funds, and utitility funds is very telling. People are giving up on stocks (known as capitulation), which means they are FINALLY getting back to a level where they are bargains. When stocks are bargains, they offer great upside potential over the long-run.
I think this guy is making a huge mistake. Instead of moving money out of stocks, he should be buying more. Sure, there’s no guarantee that stocks will move up anytime soon but…he’s 25-YEARS OLD! What does he care what the market is doing now?
I know it’s no fun to look at a sagging retirement fund. My wife and I are down 40% so far this year. It’s not fun to check our balances. But, I’m still 100% stock funds and have never considered moving money around. Instead, I’m looking at our budget and planning on MAXING out her 401(k) in 2009.
My advice for Harris, the guy in the story mentioned above, is to max out your retirement plan and file away your retirement plan statements without looking at them. Looking at them is only going to make you want to move your money around. The only time that’s advantageous is when you see something coming, not when it’s already passed.
Topics: Investing | 15 Comments »
December 23rd, 2008 at 12:35 pm
I have my funds all in mutual funds and I watch what it does nearly every day. I know this is completely against what everyone says you should do, but by doing this I see “small” changes not a full 3 months of change at once. Sure it will go up and down up to 8% in one day recently, but at least I don’t look later and see that 40% all the sudden.
I am also not too concerned currently, but it would be nice to see what everyone has seen before, I have only been above my total contributions for 2 days ever since starting to invest this year is my first year.
December 23rd, 2008 at 2:10 pm
I couldn’t disagree more. 2009 is very likely to be worse than 2008 for US stocks. Get out while you can. Wait until 2010/11 before getting back into US stocks. Foreign stocks are another story, they may be closer to the bottom.
December 23rd, 2008 at 2:15 pm
So Curt, you are saying that while stocks are down you should get out and then when they are back up again you should get in? I don’t understand the logic. That’s basically like saying “I’m going to wait until this stock is more expensive and worth more before I buy it.” I thought the logic behind investing was buy low sell high…not buy high sell low and wait till it’s high again to buy.
December 23rd, 2008 at 2:22 pm
Big mistake, why would anyone pull out now, he does not need this money for another 45 years… More bargains for us…
December 23rd, 2008 at 2:23 pm
Completely agree. Great post. I keep trying to get my friends to understand that what happens today has very little to do with what happens over the next 30-50 years. I’m not sure my screaming “FOCUS ON THE LONG TERM!!!” works, though.
December 23rd, 2008 at 2:28 pm
Good advice, JLP!
December 23rd, 2008 at 11:20 pm
Invest at your own risk, but keep in mind my economic understanding led me to a 3.5% gain in 2008, verses a 45% loss.
What makes you guys so confident that the US market is even going to be around another 45 years? Is it just because everyone else seems to think so? Do you realize that the same everyone didn’t see the global stock market meltdown either?
This recession is not just another 18 month’er. This is the big one that could take the US off the map for good. The dollar may not survive the formation of the global financial system that is under discussion.
I know it’s going to be really hard to face the fact that the stock market may not come back for a long time or perhaps ever. It is much easier to believe a future when your money will return even if its 30-40 years from now. For some, it will take years to accept, but the sooner you get to acceptance the less money you will loose.
December 24th, 2008 at 7:51 am
@Curt,
If you re-read your statement, you would realize how ignorant it sounds. The stock market will not “be around in 45 years” or the market is never coming back? As long as there are companies, there will be a stock market. As long as the population increases, markets will increase and companies will increase in value. As of now, the US is still the place the rest of the world wants to live in.
Will there be financial difficulties in the next 10 years? Absolutely! The housing problem will be around for another 5 years. But that doesn’t mean there won’t be money-making companies that pay dividends. Stronger companies will build market share on the backs of weaker companies, and build value in the process.
As for the losses, these are paper losses. It’s too late for people to take their money out, but it’s the perfect time to buy solid companies like PG or JNJ.
December 24th, 2008 at 12:59 pm
by the time it finish capitulating. i think i will be dead…
December 25th, 2008 at 12:45 am
The negativity and fear that is spreading shows that we are getting close to a market bottom.
December 27th, 2008 at 9:08 pm
What is all this “bargain” talk. The “stocks are on sale” viewpoint.
Compared to what?
Stop and think about that for a moment. A bargain compared or based on what.
See, everything needs a reference point to be measured. What if the reference point is different that what you are using to value a bargain.
Stocks involve risk, that is why there is premium associated. 2008 was a giant education in risk assessment for most people, and a lesson in reference points.
What the market has done, or where it has gone,or how it has moved doesn’t mean diddly. The only question that matters is WHY.
Always ask WHY. WHY are stocks down.
Just becuase they are down 40% doesn’t mean they are a bargain, and it doesn’t mean the market is on sale. IT means the value is a lot less that we all “guessed” 12 months ago.
Got it wrong then, who says anyone will get it right now.
IF you want to invest great. Invest in something you know well. stocks, bonds, cars, homes, gold, you own small busines, whatever.
I have no idea what the market will do in the next year,5 or 10. Neither does anyone else, because the market as a whole is IRRATIONAL. Think I am wrong?
the S&P500 index now has posted a negative 1,3,5,and 10 year return as of 12/25/2008.
How many people were “sure” that the next ten years would be ok in 1998. OOPS!
How may retirees got shafted because things were a bargain or on sale in 1998. Or 2003. Or 2008.
Newsflash. There is no bargain. There is only current value. That value is determined by current and future guesses. People think we are nearing a bottom. Maybe. Maybe not. It is pure speculation, as is the market in general.
As uncertian as the market is now, it is not investing, it is gambling. Good Luck.
December 27th, 2008 at 9:15 pm
Jimmy:
Your name got it right:)
Curt isn’t necessarily all that far off. The largest corporations in this country, the largest investment banks, and the largest moneycenter banks are all in dire straights.
The largest S&l and the 4th largest bank collapse. All others need govn’tbailouts.
The largest insurance company (AIG) though unsinkable goes down.
PAy attention. IT is much worse than you think.
December 30th, 2008 at 12:20 am
Folks, There are very good arguments for buy and hold and very good arguments for market timing. I think you all know the reasons for buy and hold. The market generally gains 10% per year over the long-term.
We have had several long periods of almost no gains other than the great depression though. Check out 1965-1984 Dow Jones historical charts on stockcharts.com. This can be devasting to someone close to retirement.
I have adopted a strategy of using both buy and hold and market timing stategies. I will market time up to 50% of my 401K and I always leave the other 50% fully invested. So far, market timing has reduced my losses in the bear market of 2001 and 2008. My recovery is also much faster since it takes a 100% gain to recover a 50% loss.
January 3rd, 2009 at 4:21 am
I do believe that long term investments in stock market would fetch in the long run. As the market is trading low, I think this is the right time to invest.
March 5th, 2009 at 5:28 pm
It’s amazing how confused all you stock market loving people are. You don’t understand so many important elements of long-term planning it is sad to see. What about:
-Average vs. Actual Rate of Return
-Taxable vs. Tax Free Distribution sources
-Loss of capital on taxes and management fees
Traditional Planning is a joke, you people who say build your retirement on the stock market continue to be naive and ignore what is really happening and how things really work….it is sad. You need to figure things out or you will be the same as the thousands of retired people now who are panicing b/c of their loss of money in the markets….WAKE UP! The market should not be your foundation!