Friday, March 6, 2009

Intelligent Panic

"You'll find more cheer in a graveyard."
- character in “The Two Towers” – J.R.R. Tolkien

“Funerals are for the living.”
- Dear Abby

You watched your 401k account drop -40% in 2008. You thought “Recovery is near, don’t do anything hasty.” In 2009, you’ve watched it drop another -20%. You’ve been thinking “Obama’s in charge now - recovery is at hand, don’t miss out on the turn.” CNBC just ran their “Is The Bottom in?” story for the millionth time. You’ve been pondering the same question. [Is “million” big enough? Maybe we should say “ka-jillion” to denote the new paradigm of REALLY LARGE numbers.]

Today you have the same choices you had in October 2008: you can sell and get out of the way; you can stay put and ride it out (with or without re-balancing); or you can try and trade the market. Make no mistake: this is a trader’s market.

Here are the reasons you are or aren’t following one of these strategies:

1. You haven’t sold because you are convinced you’ll miss The Turn – or – you have sold and gone to cash because you’ve given up on waiting.

2. You have re-balanced because you have a time horizon that will make the current turmoil look like a speed bump in the rear view mirror – or you haven’t re-balanced because you are afraid to sell the only positions in your account that are holding up.

3. You aren’t trading because you don’t know what to do, don’t have the proper tools and probably don’t have the temperament for it – or – you are trading in which case you aren’t reading this anyway. Those with the proper tools, temperament and the courage of their convictions can make money trading in this market.

All of these approaches are valid – only you can decide which one will work for you.

If you believe that the markets will revert to their long-term mean returns given enough time – and you have enough time to give - then the best advice is “do nothing” or “re-balance”. Re-visit your risk tolerance and time horizon and act accordingly. Contact me for a self-scoring Risk Tolerance Questionnaire.


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