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« More thoughts on the Subprime Crisis | Main | The Lord’s Way vs. The Government’s Way »

May 10, 2008

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That is great advice most of the time... but not this time. The market is in major trouble. The reason is because the dollar is in major trouble. The entire world is on the verge of selling their dollars for other currencies. Two-thirds of the dollars in circulation are used outside the US. When foreign nations sell their dollars, the value will drop by 50-70%. Because of this, all dollar based assets (stocks and bonds) will drastically loose value.

This time is different from previous crashes, because in the past the US had a positive saving rate and a positive trade balance with high exports that lead the market back to gains. None of this exists this time. The dooms-day crowd has been wrong so many times trying to predict the day that the US debt driven economy will crash that people have become immune to their ideas (like Ron Paul). But, the day is still coming, the facts are still real and the national wealth is declining. The next five years are going to be very hard on the markets. Get out as soon as you can.

CNN Money is just as wrong as the investors who told us a few months ago to invest in Bear Stearns.

When the market is dropping, it is hard on your attitude. After many mistakes, I have found a solution that works for me. I stay fully invested but put 1-2% of my portfolio in SDS (200% inverse S&P500 ETF). That way, I am ambivalent to a market drop and it is easier to stay fully invested because at least something is making me money.

I think that the aswer for question if you should stay in the market is not that simple. In my opinion it should depend on your strategy, rules you obey, your financial situation and in general - investor's profile.

Personally, I prefer technical analysis. I'm rather trader, not investor. I use different tools to find best moment to enter and to quit the market. If, for example, my strategy is to use some indicators to open certain position, then if these indicators send me signal to close, I close and quit the market.

If your strategy is based more on fundamental analysis and long-term investing, then probably you shouldn't quit. Keep your plan. Be consistent in actions and remember to manage your risk.

I agree with Curt, now is not the time to invest in US stocks and bonds. The US has major problems with company earnings going forward for several years. US Dollar will drop even more. Inflation currently about 11% per year,not 4% as government reports. Currently taxes collected each year at the federal level only pay 72% of spending, about 1 Trillion of new debt each 15 months,thats $3,400 for each person (310 million) in the US.
Best investing ideals will be outside the US,Brazil,India,Russia, China etc.

Curt and Terry: if inflation is a huge problem, stocks will actually be up. Inflation = rising prices = rising stocks. What will hurt people with inflation is actually fixed securities, not variable. See link for details: http://stocks.about.com/od/marketnews/a/Inflat101105.htm

As for my investment strategy during a down market, I do something that many will find controversial. When markets are down 15% or more, I throw my entire emergency fund in stocks. Then during a recovery, I withdraw enough to cover 6 months expenses, and put it in less risky investments (CDs, savings acouunts, or whatever the high rate is for fixed securities at the time) Like I said, this is risky, and I don't encourage anyone to follow. Then

Curt and Terry - a number of US companies actually benefit greatly from low dollar. Many large companies especially in technology are international with large portion of their earnings coming from outside the US. My employer is one of these companies. Not only low value of the dollar makes our products cheaper, but when the income made from foreign sales is converted into dollars, they result in larger dollar amount. A few of these companies including my employer just reported great earnings helped a lot by low dollar.

At the same time, low dollar may make it less of a bargain for these companies to hire employees elsewhere, so it may actually benefit US employees and consequently US economy. I'd feel a whole lot more comfortable if my collegues in India and China earn a lot more money in dollars.

Not sure if you gloom and doom scenario is right. Currently I keep about 30-40% of my assets in secure investments, the rest in mixture of mutual funds, ETFs and individual stocks (some of them foreign). This is mainly due to my age - late 40s than fear of impending doom. I am curious about your allocation given that you expect our markets to crash - all in CDs, bonds and/or natural resources?

Curt and Terry, you're right, guys. THIS TIME is different. The big bang. The sky is falling. The dollar is falling and it will never stop. Stocks will plummet forever. You guys should keep selling.

I hope people like you keep telling yourselves that, so that I can keep buying more each month while prices are low.

Thanks for the 10% off sale!

I do agree with the other posters that the market is in for some seriously disruptive times. Not since the Great Depression have we seen such a forelooming crisis. Granted, we survived the GD, and I'm sure we'll end up surviving through this coming storm.

That being said, it's still going to be a storm, and America now is a different America then before the GD. Also, unlike the GD, we are also facing a significant change to our way of life as energy prices surge. Even with domestic controls on energy costs, international demand from China and India will continue to drain the world's supplies.

America's way of life is going to change soon. Depending on where and when you invest, you might make a killing, or you might end up with a few pennies. It's all a roll of the dice.

I agree. Look at the greatest investor of our time, Warren Buffett. He holds great companies for long durations and doesn't try to time the market, because it is impossible. Basically you should buy businesses at a good price and ignore the price fluctuations everyday. If you owned a business, would you want to know its value everyday? Probably not.. you would want to know its value a year from when you bought it or maybe 5 years from then. Ignore short term prices, they are meaningless if you are holding for years to come.

- D

It is human nature to always think we are on the verge of something monumental "right now", now matter when "right now" happens to be. Recent history tells us that we are doomed by: stagflation, oil, the dollar, war (Vietnam, Iraq), the rise of the USSR, Japan, China, etc.

The proliferation of the Internet and the ability of everyone to share our doom and gloom stories just exasperates the effect. Long term investing, through ups and downs, has a century-old track record that supports the idea of staying in the market during down turns.

I'll be right there with (previous poster) Tony, buying high quality companies that the over-reactors so graciously put on sale for us.

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