From the March 2020 “CoVid” low of the Dow 18,000’s, the index has recently breached the 34,000 level.
3,000 more points on the Dow (DJIA) would make a double. Considering the massive damage done to world economies from the imposed shutdowns on both business and travel, the possibility that the Dow would reach such a milestone so soon is indeed perplexing, if not outright bordering on the unbelievable.
Gaining 3000 more points is not a given by any stretch, but the fact that the Dow is even close to a double in the face of such economic calamity begs some sort of explanation.
Analysts everywhere have opined on just why and how the incredible rally in stocks has occurred given the circumstances. We can comfortably conclude we will never know the exact reasons for the astonishing increase in stocks. The cross-currents of markets and the aggregate whims of investor sentiment can never be scientifically explained, hence the reason economics is more a study of sociology than of science.
The difference being a scientific conclusion can be replicated and its equations categorized, while markets movements are just the sum of investor beliefs and whims at any given time. As such, nothing concrete can ever be concluded where the human psyche is involved.
The next question is just how high can this market go.
No one can say how high it might go, how long it might take, or how low it might fall to, or if anything happens at all.
Whatever direction the markets do end up going will solely depend on the sum of all the beliefs and subsequent actions of the billions of players in it. As such, forecasting market direction is akin to knowing the exact path a leaf will take during a windstorm, which is an exercise in futility.
Keeping this fact in mind, investors can take a variety of actions in their portfolios:
- Do nothing (hold their positions whatever happens)
- Sell all their positions immediately
- Sell a portion of their positions immediately
- Sell all or a portion of their positions if and when prices hit a predetermined point
- Buy more positions at a predetermined point
- Buy opposing positions in an attempt to hedge (counterbalance the account, keeping in mind it may not be possible to achieve a counterbalance due to the nature of markets)
In my experience, many investors and advisors opt for #1. Moreover, I can comfortably say the majority of economic news outlets lean into the same. In other words, “hold for the long term”.
Past readers of Money Matters know I am not a wholehearted supporter of hold for the long term for a variety of reasons:
- I do not know how much “long” I have left in my “term”, and truthfully, neither does anyone else.
- Hold for the long term assumes markets always come back. Based on the advisor restriction from authorities that a licensed advisor can never guarantee markets movements of ANY kind, the statement speaks for itself. Never say never. Markets may always come back until they don’t.
- The pain and stress of a severe market crash can be excruciating. That translates to “unhealthy”, and during extreme crashes, that can be detrimental to one’s health and wellbeing, and possibly even one’s life.
- Buy low and sell high is an old market adage. It isn’t “Ride ‘em wherever they go”. I will leave it to the imagination as to how that applies. Buying stocks when they are all beat up and riding them higher means profits. You can’t do that without dry powder.
Much like leaving a slot machine when you have lost enough money, my strategies center around #4, and that is simply knowing when to get out of dodge. Consider selling at least some of your holdings if things get ugly to lessen the pain, and make that decision beforehand and stick to it.
In other words, leaving the casino when you have lost enough money, rather than to keep pulling the handle, all while watching your bank account dissolve into the nothingness of a market crash.
Opinions expressed here are those of Mr. Cuniberti and not those of any bank or investment advisory firm and should not be construed as investment advice. Neither Money Management Radio (“Money Matters”) receive, control, access or monitor client funds, accounts, or portfolios. For a list of the services offered by Mr. Cuniberti (530)559-1214. Calif. Insurance Lic #0L34249. Medicare Agent approved. Insurance services offered independently through Marc Cuniberti and not affiliated with any RIA firm or entity.