Saturday, October 8, 2011

The Downside to Owning Money

Owning money is great - until the stock market tanks.  Suddenly, you may find yourself losing more money in a month than you make in a year.  Not panicking is the key - but so hard for so many of us.

Since I left for Canada, the Republicans have been up to no good.  They want to win the Presidency in 2012, and sabotaging any kind of recovery is key on their agenda.  People don't vote for change when things are looking better.  If they can cast the Obama Presidency as "failed" they have a better chance of winning.

So, suddenly, we are obsessed with the national debt and balancing the budget - two things that probably should not be priorities during a major recession.  After all, the bulk of the national debt was accumulated under the Bush Administration, and that administration never did balance the budget.  So much for Republican core values.

Rather, they know that cutting spending will induce a further recession and slow recovery from the current recession.  When you start laying more people off from government and government contractors, unemployment will rise and more folks will go bankrupt and get foreclosed upon.  It is really a pretty simple plan.

And the way to sell it to John Q. Tax-Protester is as a fiscally responsible thing to do.  After all, citizens have to balance their checkbooks (or should have, during the 1990's, instead of taking out more and more home equity loans) - so why not government?  It is a pretty slick tactic.

So, as each government crises looms and fades, and as the recovery stalls yet again, the stock market tanks - yet again.  And in the two months I have been on the road, I have seen my personal net worth decline about 10% overall. 

Now, 10% may not sound like a lot of money.  After all, many folks pay more than that in interest on their credit cards.  But when you have a lot of money, it comes out to scary amounts.  Suddenly, 10% is a six-figure number.  And you have to have courage not to panic when you see this happen.

Back in February of 2009, the stock market really tanked - by 20% or more.  And many folks did panic.  I met one oldster who told me he "sold it all" and bought bonds instead.  And of course, all this served to do was to lock in his losses.  I held on, and within a year, I had made back all my "losses" (which were phantom losses, not real losses, as my portfolio was never worth less than I had invested in it, anyway).  My friend, meanwhile, was still down nearly 50% (having invested in high-yield and high-risk stocks before dumping them for bonds).

This sort of scenario illustrates the fundamental problem with the 401(k)/IRA theory.  We are all expected to become market investors and gurus, when in fact, even the smartest of consumers has little or no experience in the area - or the time to properly investigate and research their investments.  We have to rely and trust on investment advisers or research services from fellows in clown suits.  It is a system that is, to say the least, unsettling.

I thought about what I should do - and what I should have done.  In retrospect, it all seems clear.  Everyone was talking about a "double-dip" recession, right?  And when the first budget and lending limit impasse was orchestrated, everyone said the stock market would tank, right?  So I should have sold out then, right? 

Or maybe not.  It is easy to use hindsight to make horribly wrong decisions.  For example, in buying Gold.  Gold went up.  So we should have bought gold,  right?  So many people go out and buy it now - when the price is high.  Just as with Real Estate, the people who get burned are the least sophisticated who decide to "jump into the market" just as it peaks, after sitting on the sidelines forever.

Of course, not everything in my portfolio went down.  Which is why it is important to have a diversified portfolio of investments - and one that gets more conservative as you get older.  My insurance policies went up in value, as did some of my stock investments (a bank stock, no less, go figure).  And of course, bond investments went up in value as well.   Not enough to offset the losses in stocks, but at least enough to ameliorate some of the losses.  If I had all my money in risky stocks, I would have lost 20% or more, instead of a "mere" 10%.

With a diversified portfolio, you really don't have to worry about whether to buy or sell or whether you can time the market.  Over time, you will do well, although not every investment will succeed, and indeed, some will tank completely.

The problem with the Gold Bugs is the same as the Real Estate folks of five years ago.  By putting all their eggs in one basket, they risk it all based on market timing.  Gold will go down, that is certain.  The question is, when?  And the key is to sell out before it tanks.  And just as in the Real Estate market, many folks won't sell out in time.

And that is one reason I got out of Real Estate - in time.  While I made a lot of money at it, I realized that the majority of my portfolio was monochromatic in nature - it was all in Real Estate.  If Real Estate tanked (and it did) I would lose a lot of money.  So I sold - and diversified.  And while others went bankrupt, I did OK.

I still have two properties that make up a big chunk of my portfolio.  And yes, they have declined in value from their peak.  But they are still worth more than I paid for them, which is the real key in determining whether an investment is doing well or not.

And so, I don't think I will panic just yet.  If I sold out of one investment, at this point in time, what would I do with the money?  Put it all in Gold?  Invest in one single thing?  That doesn't sound like a sound idea.

Economies recover.  That is an historical certainty.  And the United States is not about to reach 3rd world status anytime soon - despite what some naysayers pushing book deals may say.  We will go back to work, once we realize that work is what we have to do - and that real wealth can't be created from thin air.  And this will take time, of course.  Perhaps a few years.  But not forever.

So for me, I am staying put where I am.  Tying to time the market at this juncture, based on what I should have done six months ago, would be a certain recipe for disaster.


See also: