Investing for Retirement

Investing for Retirement

Are you confused by the daily gyrations of the stock market? Are you upset that you lost a bundle in the past three years? Are you ready to give up on investing, and cash in at any price? If so, then join the club, almost every individual investor with limited knowledge about investing is in the same boat. The talking heads on the business shows continually profess a bullish stance, no matter what the market is doing.

Why is it, that if some sports GURU professes that your favorite team will surely lose the next game and have a dismal season, then you question the information and possibly disagree completely? Yet a financial GURU can spout beliefs about what a particular stock or the ‘Market’ is doing and where it is headed, and you tend to fall for it, ‘hook, line and sinker’!

Ignore their opinions. No one knows where the market is going tomorrow, let alone in the months and years further down the road.

In late July 2002, Lawrence Kudlow, co-host of the Kudlow & Cramer show on CNBC, jokingly said that “he and co-host Jim Cramer had called the 2001–2002 bear market bottom seven times, and that they will eventually get it right!”

But this is no joke. You can’t afford to depend on someone else’s guesses. You need to make your own investment decisions which you can do by educating yourself with simple market principles.

Bear Market History

From 1950 to 1999, there were over a dozen bear markets, with the average one lasting 397 days, resulting in a loss in value of 30.9 percent. The average recovery period to reach the previous high was about 622 days (1.75 years) based on the S&P 500 Index. When the previous bear market ended on October 9, 2002 the S&P 500 Index had dropped 49.1 percent from its top on March 24, 2000 to its bottom on October 9, 2002 which lasted 941 days.

Similarly, from the market top in 2000 to the bottom on October 9, 2002, the Dow Jones Industrial Average dropped 37.8 percent (the actual top was January 14, 2000), and the Nasdaq Composite Index cratered a whopping 77.9 percent.

The current bear market started when the market fell for 17 months from its peak of 14164 (DJIA) on October 9th, 2007, and by March 9th, 2009 the DJIA had dropped 54% to 6469.

There will definitely be future bear markets, and if we are in a secular (long-term) bear market, then this current bear market may not have ended yet. Therefore, the key to investing is to preserve your capital at all costs. That means you should take prudent actions to avoid bear markets and not be invested in stocks when they occur. If you do not exit the market to protect your hard-earned money, then your profits (if there are any) and even your principal will quickly shrink.

How much can you lose in a bear market?

The crash of 1929 wiped out 86 percent of the value of investors’ portfolios, and the investors required 25.2 years to break even. Since then, there have been 19 bear markets, with an average loss of 33 percent, which took an average of 3.5 years to regain those losses. Not only are bear markets deadly financially, they can and do inflict significant emotional harm as well.

Intelligent investors know that bear markets are inevitable, and therefore you should either step aside, into cash or, depending on your level of risk tolerance, implement shorting strategies using mutual funds that are specialized for investing in bear markets or exchange-traded funds.

Let’s get one thing straight.

“I do not recommend that the average investor buy individual stocks, ever!”

Stocks are simply too risky for the average investor. With the accounting scandals, SEC investigations, crooked corporate financial officers, managed earnings, and earnings targets missed by only a penny, why should you take a chance on picking the wrong stock or the right stock at the wrong time and taking a big hit?

Prudent Investing?

It is much more prudent, and far less risky, to invest in appropriate index funds, sector funds, or exchange-traded funds.

The so-called ‘Experts’ and advisors may try to convince you to always stay fully invested, “so you won’t miss out on the BEST days in the market”. But that is only Half of the Truth. So WHAT if you miss out on a few of the best days, what you definitely want to miss are the ‘Worst days in the Market’. In the end, by missing the worst times, your portfolio will not suffer the extensive losses and you will be far ahead of the game.

You don’t have to guess or make an investing decision based on emotion or someone else’s opinion of where the market is headed. Educate yourself on market price movements. ‘Charting and Technical Analysis’ is a super informative book that is truly an educational experience and available for immediate download. You will learn how to see when the market is changing directions. You can discover how to protect your investments and your principle. Invest with knowledge.

Fred McAllen