How Far Can This Market Drop?
By Chad on Jun 30, 2008 in Current Events
This question is starting to circulate through the country. People have seen their investments take a big hit since last fall. Some of the indexes are closing in on a 20% loss, and with oil rising, there appears to be no bottom. But, 20% has to be close to a bottom…right? 20% is a lot. If you have $2 million saved for retirement you might have taken a $400k loss in less than a year. Now that’s some serious pain.
The problem is that 20% is by no means the worst pain the market can dish out. There have been 10 bear markets since 1927 that have dropped more than 20%. Five of those have dropped between 39% and 85%. How far will this one drop?
Unfortunately, this is not an easy thing to predict, but knowing a drastic drop can happen can allow us to prepare ourselves to make logical decisions if/when the drop occurs.
What are some things to do after the market drops and continues to drop:
- Retirement - Continue to put money away for retirement. If you truly think the market has further to fall, stash your new contributions in a money market or some other type of fixed income/low-volatility investment. If you are a big dollar-cost- averager then please continue to do so. No matter how you allocate your money do not stop contributing.
- Save - Stash a little more in that emergency fund. If you decided for a “staycation”, boy I hate that word, instead of your regular trip to the Caribbean toss the money you saved into your emergency fund. A strong emergency fund is a life saver when the economy starts to short-circuit.
- Pay attention - If you are not an active investor follow the financial news a little closer than normal. If you are an active investor step up the time spent researching and watching over your investments. Watching the local or national news does not count, as they will always be behind the curve. Even the general chatter on CNBC will be confusing. You need to find a few intelligent sources, with differing opinions, and use the information they provide to formulate your own opinion. Two of the good sources I use are The Big Picture and Fast Money (for information only, not trades) on CNBC. If you pick the right sources they should provide a filter for the extreme psychological swings the market will surely experience over the next few months to a year.
- Make a list - Identify all the stocks/companies you would love to own, but never bought because they were too expensive. Now track these stocks and look for good entry points during the downturn. Apple is one I am watching, but I have yet to buy any. Obviously, this requires that you do your homework, so do not do this if you have not attained the necessary knowledge.
- Above all don’t panic - We will pull out of this eventually.
I can’t help but chime in with advice for people , like me, who are relatively young.
When the market dips you get a better price for your investments. Because I am young and retirement is 30 years away, I’m more concerned about getting a good price for my retirement investments than the value of those investments.
Young people would rather see the market tank now and then rise 20-30 years down the road. This would allow us to buy low now and sell high in retirement. Of course people who are closer to retirement cannot afford to have the market tank right now because they are selling rather than buying.
I can’t help but see an interesting generational financial dynamic brewing. My parents generation would like nothing more than to dump their stocks on young folks in my generation at a high price. We’d be wise to seek out better value elsewhere.
Here’s my question: If you are close to retirement and you are depending on your investments for retirement income, why the hell would you be heavily invested in stocks? You shouldn’t be concerned about the latest dip in the stock market because you diversified into low-risk assets several years back.
Dale | Jun 30, 2008 | Reply
@Dale — Good point if a little bluntly put. But, as with a lot things that make sense, some people just neglect to do them. I’m sure even you in your youthful zeal have done a few things you’ve regretted in your past. We all fall prey to inertia and ignorance. That’s why blogs like this one are a big help as we try to stay focused on the big picture and avoid panic. I hope I will remember the voice of reason when I finally think about retiring, 20-30 years down the line.
@Chad - Thanks for your soothing voice of reason! Just curious, how low is low enough for you to purchase Apple? Has it gone down at all? I’d imagine that’s one of the stocks that would actually rise in a depressed economy due to people turning to cheaper entertainment at home and on their person as opposed to buying new cars, expensive vacations, etc.
Shanel Yang | Jun 30, 2008 | Reply
@Dale - I completely agree that down markets are great for those not near retirement. I have been slowly buying as it heads down, though I’m still fairly concerned there might be another cliff waiting.
@Shanel - Glad you stopped back. I haven’t done a fundamental analysis of Apple, because it’s not cheap enough, yet, for me to do the work. What you say about Apple is partially true. Their stuff is cheaper than some other options, but it is still an expensive option and is completely discretionary. No one needs an iPod or iPhone. Plus, the digital music player market is close to being mature, so most people that want one have one. This means new purchases are mainly for an upgraded model and most people don’t upgrade when they aren’t financially secure. Long-term I think they will be the Microsoft of mobile computing devices (iPhone), but that will have to wait until this recession begins to ease.
Chad | Jun 30, 2008 | Reply