Ten years ago everyone was running after the next hot tip. The stock market was generating double digit yearly returns and the share prices of companies like Qualcomm and Intel seemed to be doubling overnight. Greed was running rampant in the psyche of investors, and no one wanted to miss out on the next hot stock.
First it got entangled in the sub-prime mess by repackaging and selling mortgages without any transparency of the risk associated with these investments. Next, a slug of Ponzi schemes started to surface, topped by the infamous actions of Bernie Madoff.
The morning commute gives you talk radio with a stockbroker who chimes in on his favorite local company. Noontime comes around and Jim Cramer is spouting his latest picks on his Mad Money show. The dinner hour arrives and two guys who call themselves the Motley Fools are chirping away on CNN’s Larry King Live about he next hot stocks to own that will lead us out of this recession.
Just when you think the stock market has hit bottom, it drops another 1000 points, as it did the week of January 13.
The gloomy financial numbers just don’t stop. Major banks are knocking on the Treasury’s door for a second round of bailout funds. Companies are laying off employees by the thousands. Scandals rock Wall Street to the tune of billions of dollars. Major brokerage firms are bought and sold off like a monopoly game.
I am not saying it is an opportunity of a lifetime. . .
. . .but there is a good chance that stock markets around the world will generate some eye-catching returns over the next ten years.
When life throws you a lemon, make lemonade.
In this case, the lemon happens to be the miserable returns the stock market has generated for your portfolio, not only during the past twelve months, but over the previous decade.
The election is over and our country moves forward with president-elect Barack Obama, who has his work cut out for him. Unemployment numbers are up and retail sales are down sharply; proof enough that we are staring into the teeth of a fairly severe recession.
Last week’s OP-ED piece in The New York Times, “Buy American. I Am.”, by Warren Buffett was interesting on several fronts.
The stock market, after dropping over 800 points today, closed down 370 points, reacting largely to the growing credit problems in Europe and weakening economies in Asia. I want to share my thoughts with you in regards to the current situation.
I saw last week where the volatility index for the stock market was running near an all time high, which comes as no surprise to me, given the 200 and 300 point swings the market seems to be experiencing on almost a daily basis. This is driven by an uncertainty over how the financial/banking crisis will shake out, fueled by the growing reliance on programmed computer trading by institutional traders.
Amid these wild short-term price swings, I received an email asking my opinion on the impact this short-term volatility will have on the longer-term performance of the stock market, and my response was, “likely no impact at all.”
In the short-run, the stock market is driven almost completely by the emotions of investors. In the long-run it is impacted by the growth and fundamentals of the underlying businesses that make up the stock market.
To that end, despite the crisis in the financial sector, the economy isn’t in a free-fall in terms of growth and productivity. Yes, unemployment is rising, and yes, the housing sector, a driving force in the economy, is in a tailspin. But we need to remember that our country is coming off a period of red-hot growth in the economy, and a certain amount of contraction is to be expected.
It is no fun to watch portfolios decline day after day and week after week, but one way to get through this period with your emotions intact is to avoid watching the fluctuations of your accounts every day. If you have created an asset allocation that is right for you based on your long term financial planning, a sell-off in the stock market of this magnitude won’t affect you long-term because your fixed income (bond, CD) holdings will cushion the downside during these months.
Longer-term, there is a strong chance that the stock market will be significantly higher two to five years out, and your stock market allocation will be positioned to take advantage of that.
If you haven’t created a financial plan that brings clarity to your longer-term financial picture, now is the time to establish one.