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Why The Equity Markets Scare Me Today

Historical Note: This is the first article I have ever written for Seeking Alpha, as well as the first article I have ever written for public viewing anywhere.

Index related tickers - YM, ES, TF, NQ (e-mini's)

As we all know, the equity markets have been on a 5+ year bull run since the last significant bottom. We are slightly above all-time index highs in the USA. Thus the average index investor would have a slightly positive return (including dividends) if they successfully held their positions through the last 13+ year roller coaster.

The reality of this, however, varies significantly from investor to investor/trader. On one end of the spectrum, good traders have done spectacularly well during this time period, while on the other end of the spectrum, long term investors who have lost faith in the markets in 2008 after being "hit" a second time in 8 years are significantly under water (this is me, FYI).

Personally, I have recently realized the serious, irreversible damage I have done to my finances by being mostly out of the market the last 5 years. And although I really would like to be a long-term investor, I just don't know how to regain confidence in the markets in order to do so. (I did fairly recently move some money in my 401K plan from the money market fund into the plan-dictated mutual funds).

Why do the equity markets scare me today? I was reviewing the longer term chart of the SPX :

If you look at the chart between 1966-1973 (pre-401k), it looks very similar to 2000-present day. If this gets repeated, then the markets will hit a lower low in fairly short order (within 2 years).

I don't want this to happen, but I am scared about it. Personally I currently have over 50% of my portfolio in cash so I am always prepared to take advantage of this type of major correction.

I believe the recent history of the stratospheric rise of the markets since 1983 was caused primarily by the beginning of the implementation of 401K plans. (quoted from an online source - In 1978, Congress amended the Internal Revenue Code, later called section 401(k), whereby employees are not taxed on income they choose to receive as deferred compensation rather than direct compensation. The law went into effect on January 1, 1980, and by 1983 almost half of large firms were either offering a 401(k) plan or considering doing so. By 1984 there were 17,303 companies offering 401(k) plans. Also in 1984, Congress passed legislation requiring nondiscrimination testing, to make sure that the plans did not discriminate in favor of highly paid employees more than a certain allowable amount. In 1998, Congress passed legislation that allowed employers to have all employees contribute a certain amount into a 401(k) plan unless the employee expressly elects not to contribute. By 2003, there were 438,000 companies with 401(k) plans).

Now with the baby boomers retiring, the unemployment rate still high, and employers cutting back salaries and expenses, there must be less money going into 401K plans, and thus the overall market, I would think. The only possible saving grace to this grim scenario is more money flowing in from foreign investors.

I am very interested to know how good/great investors have survived and thrived through these markets long-term, and what an older person (50+) should do at this point if they have been financially unsuccessful. I would also like to get input from people who have been unsuccessful like me, and are looking for ways to recover.

I plan to write a series of articles in my quest to attempt to solve my financial dilemma, as I am certain that there are other people in my "boat" but haven't really seen any articles regarding this (everyone that blogs seems to be fairly successful - ugh maybe it is just me?).

My next article will investigate trading (instead of investing).


(note-part of this article appeared as a comment I wrote to another Seeking Alpha article, which inspired me to start my own blog)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.