Fear seems to be escalating as we move closer to the final bailout, which leads to concern for what the consequences will be. How long will this take to sort out?
One reader expressed concern for an L-shaped recovery, which is to say stocks not going up for a long time.
One thing is certain, having an emotional reaction will not make things better.
We know a couple of things about the big picture. The crisis is such that there will be big failures. Hang with me on this. There are always big failures during events of this sort. The failure of WaMu (WM) seemed to not matter to markets. The shock of big failures on this go-around is over. This may help toward easing apprehension which, in my opinion, contributes to the idea that in terms of points lost we are much closer to the bottom than the top (my thought all along has been a bottom around SPX 1095). The timeline for a bottom is anyone’s guess; I’ll go Q2 2009.
We know that dramatic action is at hand. Either a bailout comes through or it does not, and if not we may have a bit of a panic as a reaction (a no-bailout-panic might actually resolve this a little faster).
So that is my opinion about what will happen (nothing new). It will either be right or wrong but hopefully I have conveyed my being less concerned with being right about bear market magnitude and more focused on sticking to the defensive strategy I laid out long before the crisis began. If you did the same, then you took proactive action and were not faced with we’re down 20%, what should we do?
I would suggest anyone focus more on your portfolio than on full and first comprehension of the bailout and other current events. If this market decline turns out to be worse than a normal-ish bear, what will you do? If it takes longer for the US market to begin to come back, what will you do? If you really think the end is nigh, what will you do? As you answer those questions you need to also ask yourself what you will do if you are wrong.
I’ve mentioned a few times that if the US is facing more of a secular thing, okay, but there are some countries that are only dealing with cyclical issues, so those countries become attractive as a starting point. I’ve been in the camp that thinks higher US rates are coming (way way too early with this), so an inverse treasury fund might become a good hold. If the dollar is headed lower, then maybe a diverse mix of foreign T-bills becomes attractive. A lot of the absolute products that were supposed to do well in a bear market will probably begin to work better as we start to stumble along the bottom (the idea behind that being that strange distortions caused them to behave strangely).
There will be no shortage of things that can work, but they may be more difficult to find. The task might not be so bad if you have been willing to go narrower than SPY / EFA / IWM for your equity exposure.
As you think about this, I would add that if the outcome for the US turns out to be as bad as the gloomiest people think, then we all need to heed that Will Rogers quote about return of as opposed to return on.
I will paraphrase from above: more emotion will not help you, but less probably will. The outcome is beyond your control, but staying level-headed and calculated is within your control. Focusing on this gives a better chance for a superior outcome for you personally.