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I have argued elsewhere that the risks of being out of the stock market may exceed
the risks of being in it, even though a major drop may occur. This article explores that position.
So writes Monty Pelerin (www.economicnoise.com) in edited excerpts from the original article* entitled Stay In Markets – Part I.
This post is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds), www.munKNEE.com (Your Key to Making Money!) and the Intelligence Report newsletter (It’s free – sign up here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Pelerin goes on to say in further edited excerpts:
Why You Should Be Concerned?
Stock market investors should be wary, very wary. These times look and feel much like 1999 or 2007. The long-term chart of SPY, the ETF for the S&P 500 looks ominously similar:
Is this time different? Will we have another 50% plus leg down as happened twice in the first decade of this new century?
There is reason to be concerned. Performance last decade ranked with that of the decade of the 1930s. Is this pattern going to continue this decade?
Are the recent highs in markets due to the liquidity blanket provided by central banks around the world? Should markets be at the levels they are when deficits and debt burdens seem intractable and destined to sink economies?
There is little logic in markets. Liquidity from central banks has made traditional valuation techniques almost useless. Markets have become increasingly like roulette wheels where your intellect and analysis have little bearing as to whether you win or lose.
What Do I Do?
We do not know what lies ahead for the stock market. Oh, we have expectations but they are merely guesses that only coincidentally will be met.
Logic tells us that the stock market cannot continue at these levels without a real economic recovery but the stock market is not ruled by logic, at least in the short-term and in these strange times of on-going liquidity injections. Markets could easily double from here in the next couple of years or they could halve just like they did at the turn of the century and in 2008.
No one who went through the last two market corrections wants to deal with a third one. Yet, that experience is inevitable for someone who remains in markets over the long term. The difficulty is that we don’t know whether the repeat is close or off several years.
Stay in Markets, Regardless
My answer to the issue of staying in or getting out of markets is to stay in. This answer is independent of whether a correction is imminent or a few years down the road because we cannot possibly know that information….There will be a time to completely flee markets. It is just not now or at least I don’t believe so.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://www.economicnoise.com/2013/03/28/stay-in-markets-part-i/
Part II: Is “Buy & Hold” the Way to Approach These Markets?
Assume that we are at a point corresponding to the beginning of 2007. How would our investing/trading techniques weather the same conditions represented by this most recent market adjustment? Would we be able to mitigate the losses (or even avoid them)? A traditional buy & hold, diversified investing strategy will be evaluated here.
Part III: Using a Momentum Investing Strategy Is the Way to Go – Here’s Proof
In volatile markets you must be able to go to cash when markets become dangerous. That is exactly what the momentum selection model does well. It protects your capital on the downside and enables it to grow on the upside! If you insist on staying in the stock market at all times, even perfect foresight cannot protect you. The ability and willingness to periodically run away beats the macho strategy of holding on.
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