The reality: Things are too bad to be true

  • Article by: ROSS LEVIN
  • Updated: March 21, 2009 - 3:28 PM

The market doesn't go straight up or straight down, so people should stay calm and adjust investments sensibly.

Monday March 9, was the day that I can point to when fear ran wild. Headlines screamed at us: Unemployment rises to 8.1 percent! The world confronts its first global recession since World War II! The stock market responded by falling to its 12-year low.

I was talking to a friend, an executive at a large mutual fund company, who said that the company call center's volume of people desperately trying to sell their stocks reached a fever pitch. Maybe you were one of those who rushed to the exits.

But a funny thing happened the next day. The market started to climb back. Some people who sold on Monday wanted back in on Wednesday. The very same emotions that drove them from a market they feared was going to zero were now making them fear they had just missed the rebound. Neither of those scenarios was real.

One thing is real: Things are too bad to be true.

Ponzi schemes such as those of Bernie Madoff or Stanford Financial obviously were too good to be true. The economy is the opposite -- things are simply too bad to be true. While things are difficult and will get worse, they will not stay that way.

In his book, "The Next 100 Years -- A Forecast for the 21st Century,'' George Friedman, a renowned expert in geopolitics and forecasting, wrote: "American culture is the manic combination of exultant hubris and profound gloom." He pointed out that in the 1950s, one of the most popular books in this country was "The Age of Anxiety.'' Fifty years after the success of that book, we predictably find ourselves with similar anxiety for different reasons.

We know that there will continue to be a string of bank failures, but they won't be anything like the thousands per week that we saw during the Depression. We know that unemployment is rising, but according to some reports, 60 percent of the workforce thinks their jobs are in danger. We know that our deficit is going to grow, but it has grown (and shrunk) before. Doom is predicted, and it is too bad to be true.

Friedman wrote: "When it comes to the future, the only thing one can be sure of is that common sense will be wrong. ... The things that appear to be so permanent and dominant at any given moment in history can change with stunning rapidity." So while common sense may have told you to sell everything on March 9, there are better ways of looking at things.

Time horizon

We don't know whether we are in the middle of a bear market rally or the next bull market, but we do know that things never go straight up or straight down. While it is very tempting to try to time this market, the way to do so is not by being completely in or totally out. The plan you need to develop must match your time horizon and your ultimate use of the money.

Your time horizon is determined by when you are going to spend your money -- not by your age. People in their 70s or 80s who intend to leave their portfolio to children or charity have a longer time horizon than those who know that they are going to buy a house in the next couple of years.

If you have been investing in stocks, and because of either disposition or needs you should have simply been saving in the bank, your strategy should be to sell equities and raise cash during these market rallies until you reach the cash position with which you are comfortable. Keep peeling money away when the market rises to predetermined levels, and set two to three of these levels.

If you panicked and sold stocks when you should have stayed invested, you need to decide first whether you are the type of investor who is able to cope with the volatility that goes hand-in-hand with long-term stock market returns. If you can be a long-term investor, then look at putting money to work when the market falls to predetermined levels. Invest some now and put more in when the market drops until you reach a place where you are fully invested. And diversify -- large, small and international stocks still make sense. Currently, we are emphasizing large stocks, but we still have holdings in other areas.

There will continue to be bad news that may cause markets to move dramatically down; if the news is less bad than expected, the markets will move dramatically up. In spite of the volatility, if your investment plan matches your financial plan, you can take solace in the notion that things are too bad to be true.

Spend your life wisely.

Ross Levin is the founding principal of Accredited Investors Inc. in Edina. He is a certified financial planner and author of "The Wealth Management Index." His Gains & Losses column appears on the fourth and fifth Sundays of the month. His e-mail is ross@accredited.com.

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