Tuesday, December 02, 2008

Market Wisdom

Yesterday the TAG 401(k) Plan had its quarterly board meeting. Along with other board business, trustees reviewed Plan assets.

Lord God but they've taken a beating.

Domestic and foreign equity funds are down 20%, 30%, and 40%. One look at the Plan's bar graphs showing where investment money is going and it's obvious that participants are retreating into fixed income investments and bailing out of anything that has the word "stock" attached to it.

This is totally understandable and completely human. Also mostly wrong. Economist John Hussman explains why:

The bottom line is simple. Stocks are a claim on a long-term stream of future cash flows. Even if one allows for a terrible and surprisingly deep continuation of the current recession, stocks appear reasonably priced or undervalued based on a careful analysis of long-term cash flow prospects ...

It's easy for people to forget this underlying reality when the market is going to hell in a major way. (Dr. Hussman has a lot more to say on the subject, so click through and read his entire post.)

If you're in the mid fifties or the first half of your sixties, you've got every reason to be a little ... ah ... concerned about the $250,000 that you so carefully and painstakingly tucked away melting down to half that. Because like, you don't have thirty years of career left to build it back up again.

But if you're on the sunshine side of forty, then hey. The tanking of worldwide equity markets is a fine buying opportunity. Your time horizon stretches out for decades, and buying pieces of top-flight companies at deep-discount prices might never come again. Take advantage of it while you can.

Of course, it's hard to remember this when you turn on your Apple in the morning and discover that you've lost another two thousand dollars over the previous twenty-four hours. You start to get queasy. All you want to do is put your dough in some money market account paying 2.5% and stay in bed until the recession is over.

But try to remember Dr. Hussman's analysis and act on it. Long term, you can profit from the current economic crapfest -- assuming your stomach is strong enough -- if you start dollar cost averaging back into the stock market.


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