The old dogma that existed for decades is that investing and putting money in equities and leave it for long-term will make you a rich man. Sure, it worked. Between 1982 to 2000, the S&P climbed from 102 to 1527- a monster 1397% increase. But alas, the world has changed since then. Volatility in market has become so common because information flows so fast and individual investors get so much details that freak them out much often. In this 24-7 news cycle, the small guys hear all and with the cable business desks, the psychology of individual investing has never been worse.
Bad news brings good ratings and do not bet against that any problem in the market is magnified by cable business anchors. In essence, as they talk about the economageddon, the small guys pull their monies from the market thinking the end is near. According to Federal Reserve, money lying largely idle in bank and money markets was $9.36 early March 2010. In May 2007, it was $7.44. So what is happening? People are moving money to safe havens and out of markets.
These are the class of investors that sell on dips and return to the market when it has climbed. They leave again when it dips again. Compared to the pros with all their computers and who-knows algorithm that buy on dips, the small guys is left confused and traumatized by market misses.
When you think the market is back to normal, Greece, PIIGS, and all variants of troubles emerge and the markets get crunched again. The question is: does it make sense to compete with the pros if you have no personal or individual investing strategy? The answer is Yes or No. The pros will always win because they source for information and follow trends more than the small guy. And their machines are very sophisticated. But they can be burnt also.
For the small guy, this era of volatility means having super safe equities in your portfolios-big caps though slow growth. You can live on dividends and look for those stocks to snail climb. Just note one thing, the concept of putting money for long-term and expect a big return is a mirage. What matters now is timing: it could be short or long-term. But timing is what matters people of earth.
Why? It is possible that you invested at the peak of 1998 and left the market at the bottom of 2008; you might not have enjoyed the long-term strategy dogma.
By next year, I expect interest rate to take off. What does that do to your investing strategy? Confidence in this market could be tough. But I have learnt one thing: following emotions and news cycle without a clear strategy is very bad. Develop a plan and follow it up.
The day I bought Citi at the bottom, I had this understanding that I could sleep in the night. It was cheap, not by financial ratios, but by being Citi. But nothing is normal as even the mighty WaMu is nowhere. What does that tell me? Watch your shoulders and have an exit plan. I cannot expect it to grow for ten years to $40. Why? Stocks grow in cents, but fall in dollars. When it reaches $8, I am out, and I hope it does.
If you believe the long-term mantra and got in 2000; you might have been off by 28% since S&P trades at 1089 this week. That is what you gained by long-term strategy. Timing is everything!
Provided that unemployment stays high, credit tight and consumers not spending, growth will tank and returns may not be promising. Large cap and stable firms may be the best place to put money in equities.
I think so because there is nothing fundamental in today’s economy with government stimulus, artificial low interest, terrible commercial and residential real estate and non-spending consumers. When the economy gets itself out of the low interest and all the global stimuli, then we can know if we can stay we have recovered from the recession. Right now, the global economy is still on life support. And you must hold that dogma of long-term with caution.
Dated June 2010