Just about everywhere you look, there is no shortage of bad economic news. The stock market is down significantly year to date in 2008, and even more so from its high of 2007. The US economy is widely reported to be in a recession - albeit some holdouts still exist. Oil prices are at record high raising concerns of inflation, while the value of the U.S. dollar is hitting all time low against currencies around the world. There are concerns over liquidity of our banks, and I hesitate to even mention the housing market. What does it all mean? Is the present situation unprecedented?
While no one can answer these questions with certainty, we can turn to history to make some comparisons. While circumstances of every of economic contraction or Bear Market may differ, they all share a couple of things in common, that being, every Bear Market is followed by a Bull Market or economic expansion; they are always difficult to predict; they are always different from previous ones of the past.
While we all should know that down markets are part of investing, they are painful to experience, and sometimes cause us to consider to stray from of our previous strategy. This becomes the most compounding of errors, because for most of us, we don't make changes until the downturn is well underway, and we don't re-invest until things improve - sometimes well after the point that we sold out. This is also known as selling low, and buying high. History is littered with big daily rallies arriving soon after big daily plunges, and vice versa. In fact, it is relatively rare to have a big daily move in one direction without a big daily move in the other direction close by. If this isn't a reason to avoid all-or-nothing market timing and speculation, I don't know what is.
Here is a metaphor of camping to help illustrate. In planning a camping trip most of us would pack accordingly depending upon the planned length of stay, and your personal risk tolerance level against not being prepared. So, if your risk tolerance is high, maybe not water proofing your food, or clothes would be necessary measures against the risk of getting wet - as you know that the sun will again come out and finally dry you off. If your risk tolerance is low, maybe getting wet at all is not even an option, and prefer to sit in a dry car and wait it out. Yet for most of us, getting sick or waiting it out is not an option, because we have a destination in mind and cannot afford to sit out and miss good days of the journey.
As surely as campers plan for rain and weather, we too should plan for down markets. Put on your rain gear, and stay the course.
