The Digerati Life

So we lost a bunch of paper money in yesterday’s stock market dump-a-thon. Then, it was down over 400 points or a little over 3%; down almost 550 points at its worst. How are you taking it?

Our local newspaper polled a number of random people about how they felt about the market’s drop yesterday, and here are a few thoughts:

Sharlee Beasley, Benicia
Yes, my gilded cage is rattling. It’s a little scary. I just have to remember how excited I was when the Dow hit 10k. This is just the icing melting a bit.

James Williams, Los Altos
A predicted sell-off seemed to have occurred earlier this month. The Chinese sell-off and U.S. drop was a surprise to me. More surprising was Alan Greenspan’s warning of a recession toward year’s end, which seems to undercut Ben Bernanke. I’ll admit I’m one confused investor at this point.

Ric Lobosco, San Rafael
No. I don’t gamble.

Bella Comelo, San Leandro
My family members who deal in stocks are definitely rattled. It is a huge loss. But, as I always told them, stocks are a risky business. They have to expect losses if they want to make quick money. Personally, I invest in mutual funds.

Of course there was also commentary by several people who believed in investing for the long term, being patient and staying the course, but I chose statements from nervous nellies for a purpose: to have them echo what many people do think when they see total market behavior like this. It’s interesting to see what volatility does to people; such days test our commitment and forbearance and make us short-sighted pretty quickly.

If you’re going to worry, let’s review why the general U.S. market tanked the way it did yesterday.

• The Chinese market dropped 9% after large gains in recent months. The Chinese government had announced that they are restricting speculative activities that are contributing to the froth and excess. It seems that investors in China are in a tizzy doing highly risky things like taking out money from their mortgages and injecting the funds into equities.
• The durable goods report came out and it wasn’t very positive. Ex Fed chairman Alan Greenspan made noise about the possibility of a recession despite current Fed chairman’s Ben Bernanke talking more about a “soft landing” in the economy.

Terrible enough for you? Are these reasons enough for you to pull the plug? Apparently, most investors say NO. Apparently, most people are unfazed. So this is good…for now.

But if this is indeed making you nervous, you must be looking at this absolutely precipitous 5 day VTI (Vanguard US Total Market) chart:

 
and this scary-looking 3 month VTI chart:

 
Instead of this 2 year VTI chart, also known as THE BIG PICTURE.

which goes to show you that it’s all a matter of perspective, when you’re gauging and judging the markets.

I try to view such total market activity from the perspective of a long term investor, but one who takes note of fundamentals in making investing decisions. I wouldn’t consider myself entirely or purely a buy-and-hold investor though because there could be instances when I decide to hedge a bit more or even to do portfolio shifts if long term bear market trends do take hold.

The kind of spook-out like yesterday’s which signals a technical break in the stock market’s movements and a shift in direction will prompt me to revisit overall economic indicators that uncover the economy’s general health. If they’re still positive, I’ll assume that the impact of a one day (or few days) sell off won’t be felt for long and the markets should eventually rebound. It’s when there’s a basic underlying change in the economy that a technical break like this can be the start of something more ominous and potentially damaging to the markets.

Time will tell what yesterday’s action will turn out to be. But it will be one of the following:
(1) A blip or non-event (market recovers quickly without a dent in it)
(2) The start of a correction or a drop of at least 10%, but not more than 20%
(3) The start of a correction that eventually presents a buying opportunity
(4) The start of a long term downward trend (bear market activity)

Depending on whom you ask, you may get different answers on what will happen next but the key is to sift through the news and analysis to determine how overall fundamentals are doing. By keeping abreast with such information, you can at least anticipate some general market movements and not get too shocked when equities make like a roller coaster.

In my opinion, with the economy currently as it is, you probably shouldn’t be inspired to bail out unless you’re a trader. I certainly wouldn’t, simply because the best redemption moves are done as part of a “big picture” or longer term strategy and shouldn’t be done in reaction to something significant that has already happened. In fact, instead of worrying about selling at this point, it may be wise to watch and see how this drop develops and whether it heralds a health restoring correction that can yield buying opportunities.