To a generation of investors raised to believe in the power of owning stocks for the long run, the markets have a characteristically blunt message: Buy-and-hold investing is dead.
The classic investing strategy that worked wonderfully through the 1980s and 1990s has been losing potency over the past decade, but old beliefs die hard. Yet die they must — if an investor hopes to weather the current stormy market climate and take advantage of opportunities they will lie in trading some time frame, not in investing.
Stock investors need to bury the past — and quickly, if they are to survive and prosper.
The time for buy and hold is during a secular bull market, like from 1982 to 2000. Not when you're in a secular bear market, which is what we are in. The job of investors' now is managing risk and preserving capital.
Indeed, the stock market's action so far in August is unlike anyone on Wall Street has ever seen. In the five trading days through Friday, U.S. stocks were more volatile than at any time since November 1929, according to Standard & Poor's.
This is what happens to an economy that's been surviving on government stimulus. Take that away, and the economy slows.
A slower-than-expected economy means lower-than-expected corporate earnings and, accordingly, a repricing of stock valuations.
People are starting to recognize that you have to price in some of these lower earnings. There was the expectation that the Fed would come to the rescue again. But, the Fed isn't coming to the rescue again and whatever we're looking at going forward is not likely to be a robust economy.
The market's near-term direction is down, and it will pay to sell into rallies until this correction has run its course, which may run through the rest of this year and into 2012.
This appears to be the long-awaited recovery-rally correction. On average the median correction should be about 25%, but because we went so much higher during the rally from March 2009 through April 2011, don't be surprised if the correction is a little bigger — 30% or more would be a perfectly viable correction off of these highs.
How Should You Be Investing / Trading Your Money:
1. Stay defensive with stock positions
The stock market's signals aren't just mixed, they're scrambled — and investors should be waiting for a clearer picture to develop. They should be sold out of riskier emerging markets, technology and small-cap shares, a good model portfolio at this point would be 50% in cash and bonds and 50% in stocks with defensive qualities.
Individual stock holdings should also be jettisoned in favor of index-tracking exchange-traded funds such as SPDR S&P Dividend ETF SDY +0.49% , giving the portfolios exposure to broad-market risk but not stock-specific risk.
Keep your conservative equities — dividend index funds, gold funds, value funds. Those are things that, if the market drops 30%, drop appreciably less.
2. Bonds are still attractive
Some of the stock-sale proceeds were pumped into exchange-traded bond funds, specifically issues focused on high-quality corporate debt and Treasurys.
Investing and politics don't mix, and lawmakers have monetary policy exactly backward.
This is a place to park money; it's really more of a 'let's hide out here until the worst of this is over.
3. Cash is king
In moving out of stocks investors should also dramatically hike cash levels to about 25% of the portfolio.
The last time the money manager's cash positions were so high was early in 2010, when stocks suffered a setback, and also prior to the 2008 meltdown.
In a secular bear market you must be a little tactical.
4. Be cautious but not afraid of gold and silver
Investors should retain some exposure to gold in their portfolios, but be mindful of the metal's stunning run. Gold is a hedge not an investment. As long as government monetary policy remains foolish gold prices will continue to rise.
Gold is trade — not a religion. Eventually, like every other cycle, gold will end with a parabolic blow-off and we have not seen that yet. Gold prices are going much higher. Ditto for silver!
5. Don't be afraid to trade
The Federal Reserve's pledge to keep interest rates low for at least two years amounts to a "transfer of wealth from savers to traders. Accordingly, the stock market will reward the quick and the agile.
In this environment everyone's a trader. Anything you have in your portfolio you have to be willing to cut loose when it starts misbehaving. I don't understand how people can ride stuff down 30-, 40-, 50%. This is no longer a buy-and-hold-forever environment; those days are gone, probably forever.
The classic investing strategy that worked wonderfully through the 1980s and 1990s has been losing potency over the past decade, but old beliefs die hard. Yet die they must — if an investor hopes to weather the current stormy market climate and take advantage of opportunities they will lie in trading some time frame, not in investing.
Stock investors need to bury the past — and quickly, if they are to survive and prosper.
The time for buy and hold is during a secular bull market, like from 1982 to 2000. Not when you're in a secular bear market, which is what we are in. The job of investors' now is managing risk and preserving capital.
Indeed, the stock market's action so far in August is unlike anyone on Wall Street has ever seen. In the five trading days through Friday, U.S. stocks were more volatile than at any time since November 1929, according to Standard & Poor's.
This is what happens to an economy that's been surviving on government stimulus. Take that away, and the economy slows.
A slower-than-expected economy means lower-than-expected corporate earnings and, accordingly, a repricing of stock valuations.
People are starting to recognize that you have to price in some of these lower earnings. There was the expectation that the Fed would come to the rescue again. But, the Fed isn't coming to the rescue again and whatever we're looking at going forward is not likely to be a robust economy.
The market's near-term direction is down, and it will pay to sell into rallies until this correction has run its course, which may run through the rest of this year and into 2012.
This appears to be the long-awaited recovery-rally correction. On average the median correction should be about 25%, but because we went so much higher during the rally from March 2009 through April 2011, don't be surprised if the correction is a little bigger — 30% or more would be a perfectly viable correction off of these highs.
How Should You Be Investing / Trading Your Money:
1. Stay defensive with stock positions
The stock market's signals aren't just mixed, they're scrambled — and investors should be waiting for a clearer picture to develop. They should be sold out of riskier emerging markets, technology and small-cap shares, a good model portfolio at this point would be 50% in cash and bonds and 50% in stocks with defensive qualities.
Individual stock holdings should also be jettisoned in favor of index-tracking exchange-traded funds such as SPDR S&P Dividend ETF SDY +0.49% , giving the portfolios exposure to broad-market risk but not stock-specific risk.
Keep your conservative equities — dividend index funds, gold funds, value funds. Those are things that, if the market drops 30%, drop appreciably less.
2. Bonds are still attractive
Some of the stock-sale proceeds were pumped into exchange-traded bond funds, specifically issues focused on high-quality corporate debt and Treasurys.
Investing and politics don't mix, and lawmakers have monetary policy exactly backward.
This is a place to park money; it's really more of a 'let's hide out here until the worst of this is over.
3. Cash is king
In moving out of stocks investors should also dramatically hike cash levels to about 25% of the portfolio.
The last time the money manager's cash positions were so high was early in 2010, when stocks suffered a setback, and also prior to the 2008 meltdown.
In a secular bear market you must be a little tactical.
4. Be cautious but not afraid of gold and silver
Investors should retain some exposure to gold in their portfolios, but be mindful of the metal's stunning run. Gold is a hedge not an investment. As long as government monetary policy remains foolish gold prices will continue to rise.
Gold is trade — not a religion. Eventually, like every other cycle, gold will end with a parabolic blow-off and we have not seen that yet. Gold prices are going much higher. Ditto for silver!
5. Don't be afraid to trade
The Federal Reserve's pledge to keep interest rates low for at least two years amounts to a "transfer of wealth from savers to traders. Accordingly, the stock market will reward the quick and the agile.
In this environment everyone's a trader. Anything you have in your portfolio you have to be willing to cut loose when it starts misbehaving. I don't understand how people can ride stuff down 30-, 40-, 50%. This is no longer a buy-and-hold-forever environment; those days are gone, probably forever.
Market bottoms are a process, not an event.
If you see a train coming down the track you don't say I'm in it for the long haul, you get off the tracks!
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