Before anyone gets too worked up about yesterday’s decline or what might come next conditions are not changing so fast as to justify the SPX dropping by 26% at the start of the year and then rallying by 30% in six weeks.
Maybe the market should be at 700 or maybe it should be at 900 but the moves between the two numbers have been panicked moves and I would not expect that we are done with panicked moves just yet.
On the way up there is hope that things are not that bad, on the way down there is fear of financial apocalypse and unfortunately I think too many people go back and forth between the two.
IndexUniverse has a post up about how poorly actively managed mutual funds did in 2008. Read the data if you are curious but it is so bad that the title of IU’s podcast version of this story was Active Management Still Stinks. I’m not entirely sure what to make of the results but I think this supports a point I have been trying to make from day one here. In bear markets most stocks go down a lot. It is easier to recognize that a bear is starting (breach of the 200 DMA and the 2% rule) than to pick the stocks that will somehow go up. In that context the path of less resistance is to simply own fewer stocks when the market goes below its 200 DMA or the market goes down low single digits three months in a row.
Last up is an interview in Barron’s with Jimmy Rogers. If you read all of the Rogers’ interviews then you will not get any new strategic nuggets or new arguments for why he is doing what he is doing but there was one comment that I would hone in on;
Rogers: If they have the same convictions that I do (about China) then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.
Barron’s: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?
Rogers: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States.
From the start of this site I have written a lot about foreign investing. I believe it is crucial and will only become more important over time. When I started the site I was at about 30% foreign, have increased since then and have said many times I could see being close to 50%, give or take, early in the next decade.
In the above quote Rogers is explicitly saying to chuck your homeward bias and put your money where it makes the most sense to you. My approach would be to spread it among many different countries, Rogers is more comfortable with a more concentrated allocation and you should do what you are comfortable with. I will take a moment to again bring up the limited utility of broad-based foreign funds like iShares MSCI EAFE ETF (EFA) for being heavy in Japan and Western Europe and also for it having a much higher correlation to the US market than narrower products. The higher the correlation the less diversification utility you get.