In the last week, people have panicked and sold out their stocks. Panic is never a good idea when it comes to investing, but as more and more "little people" get into the market via 401(k) and IRAs, the market becomes more volatile, as little people tend to panic, when they see their portfolio drop in value by more than what they just paid for a car.
Three weeks ago, we were in the midst of a mild recovery from the worst recession in 30 years. Jobs are being created, unemployment is dropping slowly, inflation is low, housing prices are stabilizing, and well, everything was going OK.
Suddenly, three weeks later, it all goes to hell in a handbasket. What happened? Were we living in a fool's paradise, or is the market presently in a mass hysteria?
The latter.
The GOP, by holding the country hostage for two weeks over the debt ceiling impasse, caused people to panic. And panic sells newspapers. Suddenly, out from under every rock is a financial "expert" on the TeeVee or radio, predicting doom-and-gloom. Our budget is out of control, we are told, today, but it was fine three weeks ago, apparently.
One self-appointed Guru gets on TeeVee and says that Social Security is a "Pyramid Scheme" and that any day now, millions of baby boomers are going to retire and be paid "$40,000 a year, each" and we cannot afford this.
I wrote of the impending retirement debacle a while back. While it will be bad, it won't be as bad as the naysayers say. Why is this? Well, for starters, people like me (Joe Middle Class) will collect maybe $15,000 a year in Social Security, not $40,000. In fact, I think it is about impossible to collect 40 grand, unless you made $100,000 a year for 40 years. And my medicare costs will not make up the difference, either. So these nightmare scenarios are a bit overstated.
But hey, bad news sells, and it is ratings sweeps week, so why not join in the "bash America" party and make a quick profit or get elected?
The GOP is leading the doom-and-gloom bandwagon, of course. You don't get elected to office when things are doing OK, so you have to convince people that the end of the world is nigh. So you stage a little political theater - a debt-ceiling standoff, or a Reichstag fire. Either way, you convince people that things are spinning out of control and that only you and your party can straighten out this mess.
And people buy this crap, too - wholesale and retail. Many Americans are now convinced that the current recession was caused by President Obama, and not his predecessor, George Bush. No, really, their memory doesn't go back more than 24 months. So the great pre-election economic debacle of 2008 and the $5-a-gallon gasoline summer is forgotten. No, it all happened under Obama's watch, right?
And speaking of which, why does the price of gas go up mysteriously before elections? And more importantly, who owns and runs Standard and Poor's and what is their political affiliation? Does downgrading American debt play into the hands of the GOP? And was this by design? Interesting questions, but as I noted before, I don't believe in conspiracy theories.
Once the nervous cattle investors realize that the world has not ended just yet - that today they will go off to work as before, but food, buy gas, and maybe look at a new car - that life will go on for the staggering majority of people in this country - that selling off stocks that pay dividends and have P/E ratios below 10 makes little or no sense at all.
Should you have sold all your stocks three weeks ago? Well, in hindsight, yes. But hindsight is a poor investment guide, and selling it all once the decline starts only insures that you are falling into the pattern of "buying high, selling low" that KILLS the small investor.
I went to a presentation by Raymond James the other day, and one slide they showed was alarming. The average investor in stocks ends up making about 1.5% rate of return, because they panic when stocks go low, and become euphoric when they go high. They jump on the buy bandwagon when stocks are going up and jump off a bridge when they go down. Institutional investors make 7% or more, buying the same stocks, because they don't panic.
It is like the Gold Bubble. Yes, using hindsight (the worst investment guide, besides the tax code) you should have bought gold in 2005. But even then, it maybe doubled in value. Using the same hindsight, you should have bought AVIS stock in February 2009 - it went up 2600% in a year - far outperforming Gold. But again, hindsight is not a realistic investment guide.
So if you sold it all three weeks ago, you would have avoided losses and you could buy it all back again today and make money. But few people do that. Instead, they sell it all TODAY, convinced that "it will go even lower and I need to sell out!" and they sell low and buy Gold at $1700 an ounce. Then a month later, gold goes down and they sell that and buy the same stocks back.
If you are invested in quality investments and have a good long-term strategy, you needn't worry about trying to "time the market" - because you can't time the market, and trying to do so will bankrupt you in short order. And yet, most investment shows and gurus teach just that thing - that you can make money by timing your trades. It ain't gonna work, chump!
The best strategy for the small investor is to diversify your portfolio. Don't invest in trendy stocks like Facebook or other nonsense. Don't try to time the market, day-trade, or some other scheme. Move toward safer investments as you get older. You may not become a Billionaire this way, but you will have a good shot a Millionaire.
On the other hand, if you listen to the fear-mongers and the TeeVee, you will be perpetually broke, in debt, and angry about how you got ripped off.
Don't let FEAR dominate your life. Don't let yourself be lead around by the nose by some politicians who want to sell you a load of horseshit.