Sunday Musings: Reasons To Worry

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Jim Jubak wrote an article recently that caught my attention. It’s titled “8 Reasons For Investors To Worry.” Let’s listen in:

Has economic volatility in the US and abroad left you somewhat twitchy? That isn’t necessarily a bad thing. The trick is figuring out how best to expend your anxiety.

This is my fourth take in less than six months on how to worry.

I wrote the first one in October, when the Dow Jones Industrial Average had poked its head above 10,000 for the first time in a year and the Standard & Poor’s 500 Index was just about to kiss 1,100.

Now I’m writing on the topic just days after the Dow industrials touched 10,000 again, but this time headed in the other direction. The Dow closed at 9,908 on Feb. 8.

In October, the worry was that the stock market had gone up too far, too fast and was ready for a fall. Now the worry is that the long-feared decline has finally arrived and that it will be much worse than the correction that investors have been waiting for. Or at least that’s the fear.

All this history tells you something about how tough the past four to five months have been on investors, who have been through two bear markets in less than 10 years and are justifiably inclined to jump at every bit of news, good or bad.

Jumping at every bit of news is actually not bad behavior. The lesson of the past decade is that investors can easily get too complacent.

Remember the saying: You’re not paranoid if they really are out to get you.

Buy-and-holder beware

I just came back from an investment conference in Orlando, Fla., where I heard a number of speakers proclaim that the 60% rally off the March bottom proves that buy-and-hold investing is alive and well. Well, frankly, I think all that remark proves is that complacency is alive and well even after two bear markets have left many buy-and-hold investors looking up at 0% for the decade.

The challenge now is to pay attention as you should — but to separate the real worries you need to act on from the day-to-day flow of noise. If you act on every bit of noise that causes a moment’s worry, you’ll do a good job of turning your portfolio into a profit center for your broker. But you won’t be doing your own returns any favors.

That still leaves us all with an important question: If some of this news is just noise (and not worth acting on) and some is important in the real world (and worth acting on), then how do we tell the difference?

And that’s where my “how to worry” list of what’s real-world important to worry about and when comes in. By listing the potential turning points in the stock market over the remainder of 2010, “how to worry” indicates what news might be worth acting on because it has a good chance of moving stock prices for more than a day or two or three.

The goal is to put together a list that tells you 1) what the chances are that something will go wrong, 2) how bad it might be if something does go wrong and 3) when things might go wrong.

Jim goes on to list 8 major worries that are all valid. Please see the above link for details. While the underlying theme makes sense and can provide hours of discussion, I don’t see a good way how you can use these 8 worries as a tool to manage your portfolio. Some of these events may very likely happen sooner or later, but the timing is the big unknown. This is a perfect example of making a good economic analysis yet not being able to utilize that knowledge to stop worrying about your investments.

To me, using trend tracking is a far easier and effective way of cutting through all the fundamental noise and actually seeing where the direction of the market is headed. Sure, as we’ve seen recently, a whipsaw will be part of the equation but in my mind it sure beats the alternative, which is wading through reams of economic facts and still not knowing when to sell, buy or head for the sidelines.

Bottom line is that while Jim’s article was well written and researched, it does not alleviate the fears or worries many investors have. Only by having a clearly defined plan of action, which includes specific entry and exit points, will you be able to sleep better at night. At least that’s how it works for me.

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Comments 6

  1. Jim Jubak is one of the smartest guys out there-honest and able to communicate clearly.
    I just returned from a trip to Miami Beach and Fort Lauderdale. The economy looks fine to me. The plane was full both ways. Restaurants were full. And that area is full of Ferraris, Lamborghinis and Bentleys. Even the homeless in Miami have great tans.
    We are surely becoming a nation of haves and have nots. A NY Times article cited on msn.com states that, for millions of people, there may NEVER be another job, and if there is, it is years away.

  2. You can consider Jim Jubak or any market forecaster smart, but for a different reason. On the third page of the article, Jim says, So what does my list of worries tell you? . You can pretty much draw those same conclusions about any period. Ulli's approach of following the market works much better than trying to predict it.

    Talking about jobs, we have a few suggestions from Lew Rockwell in one of his recent articles How to Fix the Jobs Problem.

  3. Ulli,

    Thanks for your efforts. I suggest when you place your orders using your 7% trailing stop bracket order that you set your stop loss at 3.5% (50% of TS). This way is the trend is correct, your TS will soon go up making the stop loss not valid and on the way up your loss was limited to 3.5% early when the order is placed.

    MK

  4. Ulli,
    I am wondering why you keep mentioning that this recovery will fail and that it is all "smoke and mirrors". Aren't you open to the possibility of a jobless recovery, wherein unemployment stays at the 9-10% rate that western Europe has had for decades. Wouldn't that be in keeping with the natural life cycle of the U.S., from a dominant growth world empire nation, to a scaled back "mature" democracy that spends less, by force, on things like the military and NASA, and more on social programs for our aging and jobless populations. Wouldn't this coincide with the the 21st century being China's (or Brazil's, or India's)century, with the U.S. now starting, again forced by spending restrictions and reduced revenue, to become more like France, Germany or England?
    I see this as possibility as a natural progression, much like companies phase though their growth periods to become mature "value plays".

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