Help with Money

October 12, 2008 11:00 AM

Two years ago, when the DJIA was at 11,200, I thought the market was approaching its peak, and I moved money from an index stock fund to government bonds. For the next two years, I kicked myself as the market hit 14,000.

Now, the market is full 600 points below its peak and 300 points below when I bailed. I'm wondering if I should believe the market has hit its bottom and go back to stocks. I realize it's the same concern in reverse and either way, I may lose by going back too early or too late. But, based on what is known so far, what do you think?

posted by CollectiveMind to Work & Money (15 answers total)

Obviously no one can realistically know, but I found this chart (from January of 2008) interesting:

http://www.itulip.com/realdow.htm

It essentially states the Dow should grow at an inflation-adjusted rate of 1.64% per year, and when it is growing more than that, it will correct itself.

Obviously the important thing to know here is how long are you going to have your money in before you need it? I think that's far more relevant than whether we're at the true bottom now or if it's likely to drop a bit more first.
posted by davebug at 11:11 AM on October 12, 2008

I just came across this page:

10 Bullish Charts, Signals, Indicators

It gives several reasons why the market is likely close to a bottom.

Unfortunately history never quite repeats, but referring to it is sometimes the best we can do.
posted by iguanapolitico at 11:15 AM on October 12, 2008 [1 favorite]

This question is constantly discussed on some finance blogs. For example, read the comments on The Big Picture, posts like this or comment threads like this. You'll see in the comments that everyone has their own opinion. That's why they say "don't try to time the market" and recommend that people change their positions slowly. Maybe put 10-20% in now, then check again in a few days or a week and if things still seem to be bottoming out, put in another 10-20%.
posted by salvia at 11:28 AM on October 12, 2008

I'm not always hip on the lingo, but don't you mean 6 thousand and 3 thousand, not hundred?

I don't think anyone can tell you if the market has hit its bottom yet. Personally, I think a disappointing holiday season will push it even a little lower.

But look at it this way: if it had peaked right after you bailed, and bottomed out 3000 below, would you be happy with your investment choice? That is, never mind the actual peak or the future bottom. Simply look at where you exited and where you are entering again. Even if it does go lower, timing the market to avoid a 3000 drop is still a pretty good investment strategy.
posted by sbutler at 11:31 AM on October 12, 2008

The only things that matter are where things are when you enter, where they are when you exit, and the time that has passed in between. You can hold for 30 minutes on the wild swings and make 10% these days, or you could hold long for over a year and receive better tax rates than you'd get by timing the bottom better. You could invest in an inverse-leveraged ("bear") fund and make money while it bottoms, and you could hold both long and short positions to spread your risk. Some people will tell you to dollar-cost average your way in (as above). Sometimes you'll see derivatives that have been overlooked and snatch those up.

It's really not just about holding long from a market bottom to a top, if you're looking to make money. :)
posted by kcm at 11:38 AM on October 12, 2008

First, congratulations on preserving your capital. You've done better than 90%+ of the market.

I wouldn't go "bullish" on money markets until the 20/50 signal is raised. Watch this video for an explanation and review of its power.
posted by troy at 1:09 PM on October 12, 2008

grrr - I meant "mutual funds" not "money markets" above.
posted by troy at 1:10 PM on October 12, 2008

The advice is always to forget what you bought at, and look at the prices of the stocks now. Would you buy or sell them at this price? Then act accordingly. Depending on how long your window is, of course.
posted by bonaldi at 1:11 PM on October 12, 2008

There's an entire industry devoted to what you're attempting; it's called technical analysis (as opposed to fundamental analysis). It's best left to the professionals -- for the rest of us mere mortals buy and hold is the safest strategy. Because, unless you have extroadinary talent, you are not going to make money betting against professionals who devote 60 hours a week to this.
posted by randomstriker at 2:09 PM on October 12, 2008

Gerard Minack of Morgan Stanley* noted today that The Graham-Dodd PE (based on trailing 10-year earnings**) for the S&P500 is now below the long-term average for the first time in 20 years. The measure stands at 15, after being in the mid-40s in 1999, and almost 30 earlier this year. By this metric, stocks were last this inexpensive in 1991.

The conclusion is not that stocks can't get cheaper, but rather that a well-known and long-standing gauge is signalling decent value. Adjusting for bond rates, stocks are cheaper still.

*No link. Do not ask me for a copy. Ask your MS sales rep for a copy.
**A 10-year period that includes both a pretty meaningful economic downturn and a credit bubble
posted by Kwantsar at 3:16 PM on October 12, 2008 [1 favorite]

Response by poster: To sbutler, you're right. When I typed 3,000 and 6000, something in my mind said, "No, that can't be right, that's too much," and I changed it. A teensy example of how what I think I know can make me not see facts.
posted by CollectiveMind at 5:06 PM on October 12, 2008

Best answer: I was wondering this same thing last week. In the end (Friday, when the DJIA was at 8200) I decided to sell my DOG shares (which move opposite the DJIA), and buy SPY (which moves with S&P500), and here's why: I decided that I can't predict what people will do, but I can decide whether the market is fairly valued. e.g. If I'm looking for a car, at some point I'll decide "Well, maybe I can find this cheaper somewhere else, but I'm happy to pay $XXXX for it. If I do find it cheaper later I won't kick myself since this is a fair price."

So I'm well aware everything might still fall with investors' panic, but I'm not one to ride a bubble in either direction.

Note that I'm not a fortune teller, soothsayer, seer, or prophet, though. i.e. I'm not really qualified to answer, but you did ask for my opinion...
posted by losvedir at 5:22 PM on October 12, 2008 [2 favorites]

Technical analysis is bullshit. For every successful technical analyst, there are a dozen failures using the exact same techniques.

Market speculation is absolutely no different to any other kind of gambling. Some people get lucky, make big money, and hold themselves up as evidence that "their system works".

As a small speculator, the professionals you're competing with are not really any better at guessing what the markets are going to do than you are, but because they have access to large amounts of other people's money, they're better at driving the markets and consequently making gains due to first-mover's advantage. If you think of market speculation as a web of interconnected casinos, then the large-fund guys are the casino bosses, and the house advantage goes to them.

If gambling interests you, then by all means try to make money by timing the markets. I strongly suggest, though, that you keep track of how much time you spend on researching your technical models and collecting their inputs.

I'll bet you a dollar that you'd get a better rate of return on your time by doing your investment the Buffett way, digging through balance sheets and financial reports and attending stockholder's meetings and figuring out what price you think the shares you're looking at should be trading at.
posted by flabdablet at 2:43 AM on October 13, 2008

flabdablet: Technical analysis is bullshit. For every successful technical analyst, there are a dozen failures using the exact same techniques.

Wouldn't this mean that TA does indeed work? From what I remember from my Fiance 101 class, and A Random Walk Down Wall Street, your statement above applies to Fundamental Analysis. Over time how many successful TA analysts have there been? Most people aren't very good at FA either, but aren't people like Warren Buffet, and George Soros proof that FA does work?

Just so it is clear-I think TA is bullshit too.
posted by MrMulan at 5:55 AM on October 13, 2008

Wouldn't this mean that TA does indeed work?

If by "work" you mean "work about as well as throwing darts at the stock price pages in my daily newspaper, selling the stocks the red darts hit and buying the stocks the green darts hit": I guess so.
posted by flabdablet at 8:06 PM on October 13, 2008