Dow 10,000: It's Do-Over Time!

Remember the grim days of March? You should. Millions of small investors across the country were staring aghast at their brokerage statements, with one thought going through their heads: “I should never have invested in the stock market”. They’d done so on the advice of people who had assured them that stocks always go up over the long term, and then they’d seen their holdings decimated. In hindsight, they decided, they had less of a risk appetite than they needed to have that kind of exposure to the stock market. But selling at the bottom and capitulating to the bear felt impossible.

The good news is that the current stock-market rally has given them a second chance. If you’ve been diligently putting money into stocks for years, there’s a good chance that the current value of your portfolio is not hugely lower than the total nominal amount saved. If you had an idea, back in March, of what your risk appetite really was, then now’s the time to rebalance your portfolio in line with the degree of risk aversion you discovered in yourself seven months ago. If and when stocks drop again, then you really will only have yourself to blame.

Of course, everybody’s individual situation is different, but in aggregate we’ve gone from devastation to mere pain. And when you’re involved in something painful, and you can get out of it, a quiet exit is often the best thing you can do. Of course, stocks could go up further from here. But that’s not the point. Unless you can afford to see your stocks fall, you shouldn’t be invested in them.

You don’t need to sell all your stocks, of course. Some exposure to equities makes perfect sense. But make sure you have a decent cash cushion first. And if you have any kind of debt at all — even if it’s just a mortgage — there’s a strong case to be made that you should pay that down by selling your stocks. Paying down a 6% mortgage is the functional equivalent of getting a guaranteed 6% return on your money, risk-free. (Ignoring the tax benefits of having a mortgage for the time being.) That seems a lot more attractive than buying stocks at these levels.

Comments

[Ponchovilla:]

Felix:
"If you’ve been diligently putting money into stocks for years, there’s a good chance that the current value of your portfolio is not hugely lower than the total nominal amount saved.

Is this a testimonial to convince GrandPa that he should drag some cash from under the mattress and invest in stocks?

Oct 15 07:59 PM

[untrusting ...:]

Retail investors and presumably retirement account investors are doing exactly that ... rebalancing into bonds. As Morningstar pointed out yesterday, inflows into the market in 2009 are only $14.5 billion into stocks but are $254.5 billion into bonds. This is about 20:1 in favor of bonds vs. stocks.

Which brings up the question of who is buying US stocks and driving the prices virtually straight up for 8 months? It obviously isn't retail or retirment investors as they are buying bonds. Insiders have been selling in record numbers, with almost zero insider buys, so it sure isn't any insiders. Corporate share buybacks are drastically down, so it isn't the companies. Who's left then ... how about the prop. trading desks (GS, JPM, MS) and a few HFT's ... bingo.... many SA articles have demonstrated that these big boys have accounted for as much as 50-70% of the entire trading volume. One wonders what they are gonna do with all those shares and where they think they are going to find future buyers at these prices (other than trading back and forth between themselves)?

Oct 16 12:07 AM

[Smartinvest...:]

BINGOOOOOOOOOOO!!!!!!!...

I say this report on CNBC and I found myself dumbfounded as to where all this money in equities had come from? Then I realized, the rally is driven by big boys and THEY ARE suckering the retail investor in, that's the whole plan.


On Oct 16 12:07 AM untrusting investor wrote:

> Retail investors and presumably retirement account investors are
> doing exactly that ... rebalancing into bonds. As Morningstar pointed
> out yesterday, inflows into the market in 2009 are only $14.5 billion
> into stocks but are $254.5 billion into bonds. This is about 20:1
> in favor of bonds vs. stocks.
>
> Which brings up the question of who is buying US stocks and driving
> the prices virtually straight up for 8 months? It obviously isn't
> retail or retirment investors as they are buying bonds. Insiders
> have been selling in record numbers, with almost zero insider buys,
> so it sure isn't any insiders. Corporate share buybacks are drastically
> down, so it isn't the companies. Who's left then ... how about the
> prop. trading desks (GS, JPM, MS) and a few HFT's ... bingo.... many
> SA articles have demonstrated that these big boys have accounted
> for as much as 50-70% of the entire trading volume. One wonders what
> they are gonna do with all those shares and where they think they
> are going to find future buyers at these prices (other than trading
> back and forth between themselves)?

Oct 16 02:57 AM

[Roger Knights:]

I think the guys in DC realize that if the market weren't goosed, it would put a squeeze on pension plans, which would put a squeeze on corporations, which would create a self-reinforcing deflationary cycle. So, via various methods of letting Da Boyz get access to cash to play with, in return for saving their skins, the market has been pumped upwards. I guess the guys in DC figured there was nothing else they could do at that point but throw a "hail Mary"--and maybe there wasn't. But the odds of them scoring a touchdown are low. Don't bet on it.

Oct 16 07:10 AM

[La Marque:]

Gen X and the Millenialls are putting money into equities. The boomers are putting new cash into bonds. Tax deferred accounts can not take losses, so people just held onto the equities in them. Overall, from what I see, most retail investors have sat out the last year,

Oct 16 09:40 AM