Posted by: Ben Steverman on January 22, 2008
A few observations as the stock market gets crazier and crazier: (I know some of these are obvious, but maybe they’ll help.)
1. What you should do in a market like this depends a lot on who you are.
If you’re a long-term investor and don’t need cash for a while, this might be a good chance to sink more into the market and buy up some quality companies at good prices. If you’re lucky, stocks will bounce back and you’ll pat yourself on the back for buying at the bottom. But if you’ll need the money soon, you might consider exiting the stock market entirely. Steve Merkel of FAC Wealth Management set up a non-equity portfolio for his more nervous investors. It includes a commodity fund, government bonds and corporate bonds.
2. Cash ain’t so bad.
As Merkel pointed out to me: With some money market funds earning 4.6%, cash looks like a good option. With the rate cut, that yield is likely to fall. But if you think, as Merkel does, that stocks could have a tough year to 18 months, then cash offers a way to earn some small returns while your money stays safe.
3. Nobody really knows.
Some of these points are obvious, but it’s worth reminding yourself. No one really knows which way the market will go. Pundits love to talk about history, but which of its many, many lessons apply to today — 1929? the 1970s? 1990? 2000? It’s true stocks tend to move higher over time, but it’s also true that stocks have often gotten stuck in holding patterns. And the stock market very often does the completely unexpected.
4. Beware the “sucker’s rally.”
Stocks could bounce back quickly from their January lows. (They could also keep moving lower.) But if they do rebound in the next month or so, it doesn’t necessarily mean our troubles are behind us. History, although never a reliable guide, is full of examples of sharp recoveries that quickly fizzle.