Posted by: Aaron Pressman on January 23, 2008
Whew, the market has whipsawed all over the past few days. There’s a heckuva a lot of commentary this week suggesting it’s time to go bottom fishing for stocks, or certain stocks or even just that you should rebalance all of your various investments. Instead, I have to say I’m not really sold on all this advice - I’m favoring former Wall Street derivatives trader Roger Ehrenberg’s thought today:
Let the elephants stomp and the angels cry and celestial bodies spin backwards on their axes for a while. It’s just not worth getting all in a froth about things. If you are diversified, that is. If you have all your money in a high vol stock which is exhibiting tremendous downside volatility at the moment, well, you haven’t been reading this blog and I can’t help you. But if you do have a modicum of diversification, some stocks, some bonds, some cash, some real estate, a little gold and energy ETFs here and there, and if your time horizon is more than a month or two, you’ll be ok. And by all means lay off the CNBC and Fox News for a bit - it will give you an ulcer. Even give the business page a rest for a few weeks. Or maybe a few months. Or more.
Why not go bottom fishing? Exactly what knowledge are you bringing to bear by stepping into the breach? Jason Goepfert, president of Sundial Capital Research, checked out some of the leading contrarian indicators over on the Minyanville blog today. And whether it was the options markets, sector fund trends or short sales ratios, the data remain ambiguous — certainly there are a few signs of an oversold market but it’s not a screaming buy by historical standards. The surest opportunities come when the markets get way out of whack and that hasn’t happened yet. And some of the most important valuation measures, like price to earnings and price to book, are currently calculated off numbers that look very likely to shrink as the economy slows and the subprime disaster continues.
Then there’s the idea that you need to rebalance your portfolio because your stocks allocation might be too low after the recent market drop and/or your fixed income bets are too big. Turns out the research on the benefits of rebalancing is extremely mixed. Vanguard guru John Bogle noted on his blog last year (Scroll down to the third question) that the potential lost return from selling a top perfomer has been four to six times greater historically than the potential loss avoided from cutting back on an overheated asset class. Even a very studious and complex look at rebalancing in the Journal of Financial Planning found that most methods of attacking the problem brought little gain and vary widely depending on market conditions and trends over several years.