Monday, October 13, 2008

Erratic Behavior in Crazy Markets

This economic meltdown is causing people to change long held investing strategies. Some times in a good way and often in ways that are bound to have some negative consequences down the line. These days pretty much every conversation I have with people devolves into a discussion of the markets and the sharp decline in stock prices. It seems like everyone always wants to talk about their portfolio... This post is about three investors I spoke with last week, and about how each of them is handling the situation:

Investor A - my brother in-law - an MBA, executive in a large (and stable) bank, and an extremely conservative investor. After years of holding their entire portfolio in money market accounts and short term CDs, my sister and brother-in-law have decided to put their money into the stock market... and now, of all times. My brother-in-law feels that the stock sell-off is way over done, and that this is a very good point in which to finally get into the market for the long term.

Investor B - President and General Manager of a $50M Silicon Valley high-tech company. As of Tuesday of last week, this high powered executive does not have a single red cent in the stock market. He fears that the economy is completely disintegrating and that additional steep declines are in the cards. He thinks that the damage to the stock market which will happen in the next few months will take five years of investing to undo. So far, this week, he certainly lost less money than I did.

Investor C - a former colleague and mid-level marketing manager. This gentlemen is going "all-in". Not only is he continuing his investment strategy, he is upping the ante and investing in a fund that is supposed to double the returns of the S&P, both up and... down. ARRRGGHHHH... the sheer terror of it...

Three investors, three very different approaches all with one thing in common - they are each responding to perceived market conditions. These investors each changed their strategy based on the precipitous drop in the market. In each case the motivation is either fear or greed.

I have chosen to stay the course. So far, and especially this week, this has been a gut wrenching experience. However, I gotta believe that if the strategy is fundamentally sound, there is no reason to change it. Once again, I will stick to the plan. Come the 15th of the month, I will make my regular monthly contribution to our stock portfolio, while keeping a barf bag close at hand.


Adam said...
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frugal zeitgeist said...

I'm doing the same. Pass the barf bag, pleeze.

plonkee said...

My new criteria for whether a strategy is good or not
(1) does it sound boring?
(2) will it return more than inflation?

Putting all your money into the stockmarket because you think that over then next few weeks/months there will be amazing gains sounds exciting. Therefore it fails.

Investing regularly in a broad based index fund sounds boring. It's exactly what I'm doing too.