Saturday, September 13, 2008

Dealing with Investing Uncertainty

"The unknown future rolls toward us." - Sarah Connor in Terminator 2

Investing during the current economic situation has a lot of people baffled, including many experts. In the past, many advisors (and personal finance bloggers) advocated investing in index funds and forgetting about them until retirement. However, this year has been a tough year, with major indices down 15-20% year to date. Also, the S&P index return has been around 0% for the past decade.

Many experienced investors and advisors I know view the current situation as one that is different than anything they've ever seen. Uncertainty is the dominant perspective. There are many differing opinions on where to invest.

Here's how I'm thinking about investing at this time:
  • Maintain or reduce dependence index investing. With the bull market of the eighties and nineties, everyone did well by investing in a diversified stock market index. However, there is a market expression, "Don't mistake a bull market for brains." We all looked smart during a 20 year bull market. Too many people, including experts, assumed a diversified stock market index was the solution to doing well in the market.

    The last 10 years have been have shown that index funds can be flat or losing for long periods of time. The S&P 500 is about flat during that time and the Nasdaq is still over 50% below its all time high in 2000. However, during the same time, there are stocks that had significant gains, e.g. Research in Motion and Monsanto.

    Prior to this bear market, I was planning to increase the amount of funds invested in a diversified stock index. No more. I will continue to keep some funds in a diversified stock index, just in case a bull market resumes. But I won't increase our reliance on an index fund or ETF to deliver the returns we need.

  • Look for companies that can shape the future. For individual stock investing, I want companies who have the potential to be the Microsofts and Dells of the future. In this area, my current picks of stocks for a new era are Amazon and Google.

    Being right can return significant gains for a $1000 investment. However, I need a few more options in order to increase my chances of being right once.

  • Be patient. The bear market will end and a bull market will resume. I plan to wait for a relatively clear indication before putting new money into the market. In addition, I plan to keep funds from sales in cash until market indicators confirm a strong upward trend.

    I realize that I will miss out on some gains since a bear market bottom is confirmed long after it occurs. However, I am willing to trade off some gains to eliminate the pain of new investments falling as the bear market continues.
  • With the market likely to be very volatile through 2009, I plan to stay in my managed accounts, keep my core long term holdings, and sell off a significant portion of my company stock, which is now positive for the year and within 3% of its all time high . For now, I plan to put the cash from selling my company stock in CDs, waiting for a signal that the bear market is over before investing the money in equities again.

    Disclosure: At time of publication, I own Amazon and Google in my personal trading accounts. Our managed accounts own Microsoft, Dell, Research in Motion and Monsanto.

    For more on Reflections and Musings, check back every Saturday for a new segment.

    This is not financial or investment advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC


    Anonymous said...

    Thanks for this insight. I have heard that not jumping the gun, during a time of economical hardship is the best approach.

    It seems to me that investors react to every tiny thing and that being the guy who keeps his calm can be more rewarding. Do you have any thoughts on that?

    Super Saver said...

    @ Tennyson,

    I think it is important to have a consistent investing strategy that I am comfortable with in both bull and bear markets. That way I don't panic when the portfolio goes down or become complacent when the portfolio goes up.