Either Have The Temerity To Hold Stocks Or Get Out Of The Market
One of the first studies of the recent market splat found that the investors most likely to be crushed thought they were investing for the long haul, only to be forced into cashing out at the worst possible time. According to the study, cleverly titled "When Everyone Runs for the Exit," there are only two good ways to react to a liquidity crisis: hold onto your portfolio and trust that it will recover, or fold immediately to limit your losses.
Folding is far from ideal, but if too much of your money is tangled up in the markets, it may be the best way to quickly extricate yourself before things get worse.
The professor refers to the investors between these extremes as the "strongest weak hands." They end up losing the most money. These investors "initially think they have a strong hand," he said, and hold on for a while as their losses become more severe. Eventually, they discover that they aren't as strong as they initially thought - emotionally, financially or both.
They "are forced to sell at or near the bottom," he said.
These findings may be particularly unsettling for some converts to buy-and-hold investing from 2002 to 2007, who held onto their positions for months as stocks became toxic in 2008, only to sell at a loss deep into the debacle. Professor Pedersen says these people probably would have lost much less had they never tried to become buy-and-hold investors and instead remained short-term traders.
Their outsize losses aren't the fault of the buy-and-hold approach, the professor says. Instead, the problem is that they failed to appreciate how much patience and fortitude are needed to tolerate a liquidity crisis. Trying and failing leads to greater losses than not trying at all.
We wave goodbye to any money invested in the market. If it ever reappears, wahoo!, what a nice surprise. That's the strategy that lets us sleep at night, but for other, better ideas, check out the post How Not To Panic About The Stock Market.
Hold or Fold, but Don't Waver [The New York Times]
(Photo: Atomische • Tom Giebel)
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Comments:
@Coop: Or research until you feel confident that the dip in the market will be substantial enough to justify the short-term losses you'll incur by folding, and understand your own willingness to risk and jump back in when you feel the market is near bottoming out, AND THEN buy-and-hold for the long term. If you do it right, you'll lose less, and become profitable sooner.
Other wise known as panic selling . I begged relatives and friends not panic sell major stocks and funds and by that I mean no GMs or Countrywides in their portfolio .
I also told them bonds or bond funds were the place to be and they were cheap until late this spring . I've also just don't look at a stock as a business you do have to study it as a stock . I look for higher volume stocks for the amount of interest or people willing to play the stock GAME . And I look at the charts . If I see regular buying and selling it interests me . The only thing with regular highs and lows means that the day traders are in there taking their smaller but immediate profit .
I've even heard Jim Cramer say that not that I'm a fan but I believe he doesn't believe in panic selling or buying in late in the party so to speak . That's why they say be diversified so survive times like last fall & winter .
It seems the basic lesson here is keep much more liquid cash then you expect. I almost fell into this. I had tied up to much money in long term investments. As the market tanked I was squeezed for $$ from all sides and almost had to cash out some of my investments at %50-70% losses.
Basically I got lucky and my cash savings were *JUST* enough to scrape by as I lowered my savings amount to zero. I'm on the slow road to recovery as is much of my investment.
It's unnerving to say the least to watch all of your investments lose performance while your cash dwindles.
Life lesson learned 3 month emergency fund should be in cash,not mutual funds or stocks.
America's only religion, predatory capitalism, has ruined this country. The stock market now treats businesses and the associated real lives as poker chips. It is no longer investing, but gambling. We need to do away with the market timing, day trading, etc. Require that people invest for at least 6 months and watch the management of companies change to a focus on the long haul, not just this quarter. The shenanigans to boost each quarter at the risk of blowing up the whole shebang is fataly flawed. As long as we pump & dump, no real long term growth or stability will happen.
It's too bad you mentioned Jim Cramer as your thoughts lost any credibility with it. It's sort of like the first person to mention the Nazi thing in an arguent. ;)
If your emergency fund is 3 months, you should not be in the stock market for any reason in any way IMO.
@wvFrugan: It would be nice to focus on the long haul . And since stock price necessarily doesn't reflect the business the only reason I see to even emphasize stock price is a bonus goal for an executive . In theory you could take that stock money as a loan to invest in the business . The problem is I don't think these corporations would take that 6 month loan to invest here .
That and a 6 month hold time would make it tough on the smaller to medium sized investor to cash out or buy in since the price might stay up too high .
The pumping and dumping now is mostly with the penny stocks but they are frequently the companies that need a higher stable stock price the most . Many tanked themselves to become a penny stock others are start ups trying to raise money and get recognition .
This is not the first article I've seen from the Consumerist that's bashed the stock market and investing. I understand that the past year has been a very rough time for new investors, and it's not hard to feel that you can't make money in the stock market.
However, if you understand what you are investing, what your goals and time horizon's are, and understand that you may have to sit through a rough market, odds are you'll come out ahead.
Rather than bashing the financial industry over and over (I'll admit, they DO deserve much of the bashing, and they've made some HORRIBLE decisions) I'd like to see some articles helping educate people about the stock market, and investing in general.
@u1itn0w2day:
I was wondering who would bust me on the pump & dump not really being applicable to my argument! I was working on a wordsmith trifecta with shenanegas, shebang, and pump & dump. I guess my gamble didn't work any better than those betting on the stock market game.
I got a nice bonus at the end of last year and invested half of it in straight stocks (after much research). So far so good! I bought companies that I believe in and who have historically had very high stock prices.
The thing that helps ME sleep at night though, is that when I put the money in, I wrote it off entirely. Its completely disconnected from my life and while I will be insanely depressed if I lose it, it won't do anything against my future (except for buying something nice, or maybe a small down payment on something).
I think if your new and going in with just a little money, then you need to treat it like a day at the horse races... your going in there with money that you should expect to lose, but at least have a fun time playing.
I was one of the few in my family that didn't panic. Those that did sell, and buy money market stuff, sold at as low as 50 cents on the dollar. Or even worse, if they dumped their Wachovia stock. I held on to all of my stock, and enjoyed a great 2nd quarter, this year. No, I'm not back up to pre-dive levels, but I haven't lost half my savings, either.
@Chongo:
I wouldn't go so far as to write it off completely, or to treat it like gambling money (although if that's what it takes to get you investing, go for it).
The key is not to need that money in the near future (5-10 years). If you had invested your child's college fund last summer, needing it this fall, you'd be kicking yourself right now. However, if you just had a kid last summer, starting periodic investments (monthly, quarterly, yearly) wouldn't have been a bad idea.
Treat your investments as money for a distant future - as that future comes closer, you need to start pulling out of the stock market and into more stable investments.
Research, learn, DO NOT give your money away without it. Eg. the first question you should ask your investor is if they invest in what they're selling...if not, you know to get out of their office.
You really need to know what you're getting into first, otherwise like I've said before you're just gambling or throwing away your money. Technically you can make more money faster when the market's starting to go down than when it's going up. I sold, and bought options knowing what was ahead (options is another part of the stock market game you can learn).
No people! Please panic sell so that I can pick up those battered securities on the cheap and ride the price back up when people realize the company still has value.
on my 401(k) i didn't sell but did adjust what funds i was buying into, basically trying to avoid buying stock on the slide down. when it got down where i thought it was the bottom i adjusted again and started buying at what i hoped was the low point. i was pretty close.
on my "playing" stocks (money i wouldn't like to lose but wouldn't go hungry if i did) I did the same although I also played a bit. I bought stock in Ford at what i thought was the bottom but turned out to have a few more months of downs in it (making a nice profit on it now though). I bought Apple the day Steve Jobs said he was taking medical leave and made a killing on that (computer financial "experts" don't understand Apple and constantly get their assumptions way wrong.)
Only thing I really screwed up was letting some goof talk me into a gold etf thinking gold would go up in a down market. barely broke even on that.
majority of my money goes into an all index stock etf (VTI) or a bond etf (AGG). rest is kind of a play around a bit.
Um, what about option 3, buy while the going is good?
@wvFrugan: I'm not a big fan of Cramer but that's one of the FEW things with any common sense that has come out of his mouth . If I watch it's only to know what to avoid . Even Barrons Magazine had an article on the Cramer effect where his loyal followers would pump a stock for about 3 days after he mentioned a stock then the same stocks would stall or drop .
I was getting set to try some gold stocks and funds around the same time Cramer talked about gold stocks and all the sudden they go up and are out of my range .
Believe me I'm no fan but the OCCASSIONAL bit of common sense does pop out of his mouth . I'm more disgusted with CNBC as whole especially before the bust because they WERE the cheerleaders of the companies and ' techniques ' that caused the crash .Then also were getting warm and fuzzy with the likes of Hank Greenberg treating him like god as guest commentator and yet he criminally and negligently lead AIG in financial ruin .
If your not a fan you still have to know who is playing in the game .
Even the dr doom guy has been given a hard time and yet he was or has been dead on with his predictions .
@wrjohnston19283: You must be an investment banker who makes a percentage of everyone's portfolio. In that case investing is indeed awesome.
Heh, I remember when I commented on here a few months ago in another post about the stock market saying that the downturn was basically a once in a lifetime opportunity for young people to get in while stocks were really cheap.
Boy did I ever get bashed for suggesting that people put money in the stock market. Seems to me as if most consumerist readers are cash in the mattress types.
@Coop: I ditched some loser stocks a couple years ago and am very grateful I held on to the good ones. While everything took a pretty scary dip last year, my two real winners are already back up to 2007 levels and climbing. I'd have been a colossal fool to sell during the panic.
@Kevinv: Gold itself does the better than any associated companies or funds . They tend to spike only a few times a year . You have to look at a chart to make sure you're buying low and hopefully it will spike with in the year .
That's the thing with this market the old patterns and habits don't seem to apply . I'm loosing on a gold stock as well thinking the samething . The only good thing is that I definately bought at the low end . Waiting for a spike to sell .
That Bond ETF should do well even if not now . Individual bond funds are currently rising . I buy them for the interest and dividend and not share price .
@u1itn0w2day: Can you please try to construct your sentences and type like you're from this planet? Please?
"Temerity or GTFO"
Fixed the title for you. :)
@morlo:
Nope. In fact, there is very little need for a private banker (one who takes a % of your assets) unless you have more money than you know what to do with.
With private pensions all but gone, and social security on the brink of disaster, NOT investing is setting yourself up for no retirement. If you want to stay away from stocks, at least learn about bonds or CDs. Setting aside money in a savings account is a good start, but you're going to need more to beat inflation.
I've always been under the assumption that "buy and hold" has, at a minimum, a 10-year time horizon.
If you were heavily invested in the stock market with the knowledge that you may need access to that cash, you are just being greedy in a bull market. Your money should have been in a much lower risk investment vehicle. But that would have meant earning 2-3% instead of 8-12%...
Nobody cares when greedy people lose their shirts. I have as much sympathy for these people as I do for the people that bought a house they couldn't afford on a zero down, no docs, 5-year balloon mortgage that ends up in foreclosure.
I think I posted last on this several months ago, and my first ones were just as the crash was starting.
I pointed out then that if you are laid off and MUST SELL YOUR STOCKS AT THE BOTTOM for a dime on the dollar, you can't hold them for the long term. And that is what often happens.
If you are still holding, and don't have 18 months expenses in things you would be willing to liquidate (only taking a small loss, lower risk), use this rally to exit.
Especially if you were racking up medical bills from the stress last march. If you don't have the detachment or perseverance even if you can afford it, get out.
Or at least hedge - take a small percentage and put it into a 3x inverse fund (e.g. FAZ from profunds - they also have an 3x inverse tech, big cap, small cap and others). They will get killed in a big rally, but save your bacon (bulls and bears make money, pigs get slaughtered) if we return to the lows.
@Matt: I second that motion. Picked me up some good deals while certain stocks where waaaay undervalued (example: GE around March of this year). I only wish I had more than pocket change to invest back them.
I kept all my stocks, and sunk all the extra money I could spare into stocks in January-March. Now I've made more than I "lost" (on paper) last fall and summer.
@Eric1285:
2001 was also a once in a lifetime opportunity to get in while stocks were really cheap.
2003 was also a once in a lifetime opportunity to get in while stocks were really cheap.
I do have a lot of money in stocks right now... I just hope there aren't too many more once in a lifetime opportunities to get in while stocks are really cheap.
@wrjohnston19283: Saying that Social Security is on the 'brink of disaster' feeds into the part of right-wing ideology that would prefer there be no Social Security. Or barring that, letting Wall Street use our SS contributions for play money.
The only scenario under which SS disappears is the complete bankruptcy of the US Treasury. According to the 2009 Trustees Report, SS has positive cash flow until 2016, and the SS trust fund has enough money to pay scheduled benefits until 2037. Can you think of any other long-term government obligations, or private ones for that matter, planned for 28 years into the future?
People who say that Social Security is 'insolvent' have a political agenda. It's insolvent because no one knows how benefits will be paid 28 years from now? Sorry, but that's not a crisis.
Likewise, it's not like 2037 arrives and the system blows up. We could change nothing about SS and it could still pay 3/4 of scheduled benefits until 2084.
I sold a bunch of stock near the bottom. I wasn't in it for the long-term, and I was hopeful things would turn around. A few months later I bought back in (different stocks), and now I have a big fat tax write-off for no real net difference in investment. It's a great system..
@wvFrugan: Instead of a mandated hold time I like the idea of a small transaction tax, say $0.05 per trade, as a disincentive to short-term trading.
The problem, as I see it, is that Wall Street as it exists today has largely perverted the worthy purpose of the stock market; which is the efficient allocation of capital. Look at Wall Street today, and how much of it would you say is simply devoted to helping actual productive businesses obtain the capital they need to grow?
@Haggie1: That's an excellent point that if you want available cash keep it in lower risk investment . And yes the returns will be much lower but your basis is safER .
The buy and hold strategy is done . The time frame has definately been shortend . You will have to keep an eye on them . And that means opening your statements no matter how droll they are . If you put your 401K in a stock or fund check it .
Know what you paid for it and know why you are in a fund besides strategy - are you in it for dividends/interest or an increase in share price ? Study a potential stock before opting to put it in your 401k . Look at the charts/highs & lows , check the volume/interest in the company , check the books on a company if you are a buy & hold type person and of course check the news on it . Just assume you'll have to buy and sell on occassion- but that can be a good thing .
The days of a company giving you a pension or even significantly contributing with dollars or having an arrangement with a major fund/broker are gone . YOU control your retirement .
But alot of this comes back to financial education in the high schools and colleges and if by union or a good benefit the average employee should have someone to consult or gather information on these matters - for free so they're not watching CNBC for their financial education or strategy .
@wvFrugan: "America's only religion, predatory capitalism, has ruined this country. The stock market now treats businesses and the associated real lives as poker chips. It is no longer investing, but gambling."
word. so very word.
One thing I noticed with stocks is that people buy in high since the stock had been rising for a while . Meaning sooner or later the upward trend will stop . The tech stock boom of the 90s is an excellent example . Lucent was a hot stock at 50 some odd dollars a share . Current price around 3$ per share & under new management . Buy and hold -don't think so
Just like the real estate bubble . People bought in late because real estate WAS hot . Then it dropped now we have houses underwater .
Point being you can't buy in late an expect too much and definately do not rely on a buy & hold strategy . Buy low sell high just as many have pointed out about buying in cheap . Just remember to sell high .
Never invested in the stockmarket before this year, jumped in with both feet in the first few months of this year. Pretty clear it was oversold, even to the layman without much experience. As Carey mentioned, just assume it's all lost, and if you do see it again and it's grown, nice!
The SS trust fund is nothing but IOUs from other branchs of the government. In 2017 when the trust fund starts redeeming these IOUs the government will either have to borrow more money to replace these bonds, cut spending in other non-SS areas, or raise taxes.
It's like having $1,000 that you lend to your wife who then spends the money. When you need the $1,000 back your wife doesn't have it. I wouldn't really call that planning 28 years into the future.
Assuming that the government finds a solution to that issue that doesn't cause serious harm, anyone who is retiring in 2037 or after SHOULD be concerned about social security, and should plan accordingly. If your retirement planning calls for SS to provide $14,000 a year, and benefits are cut by 25% its going to be a problem. Or worse, if you are also making $14,000 a year in interest and dividends and the law is changed to a means tested amount, you could end up with nothing when your retirement planning called for you to get $14,000 from SS, cutting your retirement income in half.
None of the serious proposals haved called for the government turning our contributions over to wall st for "play money". Some of the proposals called for individuals to make a choice regarding shifting a portion of their contributions into an IRA like account in which they would be able to invest in stocks, bonds or other investements. No one has said "here mr banker, take this money and let's pray for the best".
@johnva:
My 401(k) is now showing a net gain for that exact reason - I upped my contributions this spring and the March-July rally pushed my account into the green.
Be scared when people are greedy and be greedy when people are scared. Said another way, buy when everyone else is selling, sell when everyone else is buying.
We bought a ton of stocks, within our IRAs, in Jan-March 2009 and most of our buys from that time period are up 50%-125% because we bought so low. What are we going to do with those stocks? We plan to hold them for many years.
@Matt:
Hear, hear--reading these comments answers a question I've been having--who are the counter-parties who are letting me buy my shares for such low prices? Turns out, it's these guys.
Stocks=the only commodity that people recoil from buying when they go on sale.
@SadSam:
It really is as simple as that, but so long as there are stock-bashing news outlets and a herd-mentality, the basic wisdom of that will escape most people.
@u1itn0w2day: yeah gold has too much of a "magical" aura about it, people seem to get irrational about it, especially in off times. This time around people seemed to want real gold, not just gold stocks so the etf I bought didn't do so hot.
I decided it took too much research for me to actually be able to work in that market so I waited 'til i made enough to cover the brokerage fees and got back out.
@wvFrugan: It is no longer investing, but gambling.
At what point was it *ever* investing as opposed to gambling? Every penny in every stock market is there because the person that put it there is hoping to later get back more than he put in. Long term investors are just gamblers with a lower risk tolerance and a willingness to "play through" low spots.
I dunno, I bought a ton of Ford stock when it was at $2 a share and everyone was warning people not to buy, but I'm feeling pretty fracken good about my purchase so far!
The stock market seems like a way for people with extra money to take advantage of people who don't have extra money. I realize this makes me some kind of communist but if a company is making a profit, I think the workers should reap the benefits of their labor instead of someone who bought a share of stock.
I realize that is a simplification - that a company may benefit from an infusion of capital when you buy stock from them and this may grow jobs, etc. - and I'm not one to judge those who are trying to save for retirement using the system that is in place but I do wonder if people have any thoughts on this:
How can one invest - inside the market and without - and make socially conscious choices that aren't capitalizing on a system that puts shareholders ahead of workers?
@Techguy1138: I have my emergency fund in a CD. Contrary to popular belief, you can cash in a CD early, just usually with the penalty of losing all the interest you've gained.
My mom did this despite my fervent recommendation that she should not. She didn't have a lot in her 401k...only about 2-4k, but it was something. She cashed out at the very bottom of the market (when the dow was around 6,500). If she had held onto it, it would probably be worth 30% more now.
OR understand market trends, and only buy in companies you KNOW will be profitable.
//Own stock that is up and rising.