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Apr 09

Is Now The Time to Act???

If any of you read my posts from June and July of 2008, you will see that I exited investments in securities and moved the bulk of those investments to bonds and cash, only weeks before the August through November stock market crash.  I kept 6 percent in stocks, which continued to decline to eventually hit 3.7 percent in March 2009.  It’s back to 4 percent, marking a 10 percent comeback.

There is a lot of pain and carnage in terms of lost stock prices, decreasing home values, consumer and commercial debt defaults, and rising unemployment still to come.  Making matters worse, we still have to see a significant drop in valuations for credit default swaps, and other derivatives, such as derivatives based on commerical bonds and commercial paper debt.

But, timing the very bottom of a recession is tricky.  I seriously doubt the bounce in the stock market indexes this week signals the end of protracted up and down movements for the next 18 months.  There may be quite a bit of upward movement – the DOW may approach 10,000 – or even exceed it.  But, by Aug through Nov 2009, we should see a repeat of last years drop, and it could even drop BELOW where we were in March 2009.

But, as uncertain as the stock market has become, the alternative investments in commodities, bonds, and cash are becoming increasingly risky, themselves.   Especially with a very liberal, global money supply, the value of cash will continue to diminish as inflation becomes significant (and it will).  So, to answer the question in the subject, we can use a little math to help get the right answer.

Stocks were down as much as 40% or more from their peak, but have recovered about 10%, meaning we are still down about 33% from their peak.  However, in terms of YEARS, not PERCENTAGES, the market average today stands where it was in 1997 – about 12 years ago!  In otherwords, other than dividends, stocks have AVERAGED ZERO growth for a dozen years.

This is an interesting statistical fluke, since extrapolated out to the past 25 years, and even out past 50 years, stocks have averaged better than a 5% per year increase.  This means that, on average, there is about 12 years of 5%  per year gains hiding in the value of these stocks today!

Thus, today I shifted approximately 10% of my bond holdings and 4% of my cash to stocks.  Why not all of it?  Because I know I am buying on a bounce.  If stocks continue to climb for a number of weeks, I may even buy more.  Ultimately, I am waiting for the market to tank again, wiping out all of the near-term profits I plan to make as the market run-up continues, plus any additional as it fall through today’s prices.  This is also when I will make even more significant investments in stocks: more than 10% of my bond holdings and more than 4% of my cash I made today.

The long-term trend for the NEXT 12 years should statistically show a similar percentage increase of 5% a year (perhaps lower, maybe 4%).  And, from the very lows of March 2009, the average yearly increase should be comparatively high (likely higher than 5%) through 2021.  But, because of 12 years of flat growth from 1997 to 2009, regardeless of the actual rate (be it 3, 4, 5, or 6%), a 24 year average starting at 1997 will be roughly half the percentage calculated from a 12 year average starting from 2009.

To conclude, you have a very high likelihood of approximately doubling your return by buying at 1997 prices today, than you have by waiting until the market recovers most of it’s pre-drop value.  The time between now an 2021 will have ups and downs, so don’t try to time it, especially not to the month.  Buy some stocks now!  Buy a little more later!  As the stock prices run up, you can continue to dump cash and bonds.  Eventually, you will know you are in a bubble because prices are at, or above PEAK levels of DOW 14,000.   Once buying in the DOW 7000 to 9000 range, look to capitalize on DOW 12,000 to 14,000.  If you have a stomach for risk – see if the DOW goes to 16,000 or 20,000.  At some point, we can expect a massive contraction which will takes us down another 40%, and the whole cycle can start all over again – in 12 years!

Jeff Hamilton, Technology-Leadership

Technology-Leadership is a leading consultancy company in financial and business management consulting strategies, focusing on issues involving corporate strategy, technology, financing, planning and implementation.

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