How to Win in the Markets
By LAWRENCE MURRAY
with help from WSJ’s DAVE KANSAS
The Dow Jones Industrial Average is retracing the steps from 1996 and almost 50% below its record levels reached in the fall of 2007. The Nasdaq Composite on the other hand has fallen to near lows where it lost 70% of its value earlier in the decade. Then take Japan’s 75% market loss starting in 1990. The markets are a long term forward looking deposit system and are displaying some signs of life.
Is the stock market still a good vehicle for long term investing like for retirement since the stock-market averages are struggling?
Saving and investing depends a great deal on where you are in your life cycle. A good rule of thumb is to use your age to determine how much you should have invested in the safer assets, such as cash, money market funds, Treasury’s and corporate bonds. If you are 50, then you should have less than 50% of your assets in stocks and 50% in safer assets. If you are 30, then your retirement accounts should have a 70%-30% mix of stocks and bonds. Some people argue for the "rule of 110," which is modestly more aggressive. That rule argues for subtracting your age from 110, and having that amount of money in the stock market. So, if you are 50, you'd have 60% (110 minus 50) of your investments in the stock market.
But no matter which rule you use to make up your plan, the older you get, the more you want to move your assets away from the stock market, preserving the gains you've made. If you have a 401K, add to it regularly. If you are new to the markets, start with a mutual fund account. There are many good ones, but if you only have limited fund, I recommend TR Price as you can get started for $50 per month.
Once started rebalancing is important, or if your administrator allows, automatic quarterly rebalancing, annually changing the percentage by one percent more into safer assets when the market is up. Some people try to even maximize this simple adjustment to sell (realize gains) at the top of the market for the year thus adding to performance as well as adding small amounts to their retirement account if the market moves down or even not rebalancing in down markets till a bottom is seen. In this way, you have no option but to buy low and sell high. I say, “Always buy and always look for an opportunity to sell.”
One of the biggest mistakes research have found in the data indicates that individuals tend to bail out of the stock market closer to bottoms than to tops. Making a plan avoids this temptation as most market timer’s performance has usually not played out particularly well. But simply following a plan is not a guarantee of profits over the long run. In fact, the only winning plan, when computer look over long periods is the rule of 100 above: all other plans fail.
The stock market is a forward-looking investment instrument, meaning that it starts to rebound well before the economic data show that things are getting better. Moreover, it is usually at the depths of economic difficulty where the stock market starts to rebound. So, as tough as this period has been for the long-term investor, there are ample reasons to stick with the rule of 100. This long-term plan includes a large role for the stock market but also wants you to invest in other assets.
Write to Dave Kansas at dave.kansas@wsj.com
with help from WSJ’s DAVE KANSAS
The Dow Jones Industrial Average is retracing the steps from 1996 and almost 50% below its record levels reached in the fall of 2007. The Nasdaq Composite on the other hand has fallen to near lows where it lost 70% of its value earlier in the decade. Then take Japan’s 75% market loss starting in 1990. The markets are a long term forward looking deposit system and are displaying some signs of life.
Is the stock market still a good vehicle for long term investing like for retirement since the stock-market averages are struggling?
Saving and investing depends a great deal on where you are in your life cycle. A good rule of thumb is to use your age to determine how much you should have invested in the safer assets, such as cash, money market funds, Treasury’s and corporate bonds. If you are 50, then you should have less than 50% of your assets in stocks and 50% in safer assets. If you are 30, then your retirement accounts should have a 70%-30% mix of stocks and bonds. Some people argue for the "rule of 110," which is modestly more aggressive. That rule argues for subtracting your age from 110, and having that amount of money in the stock market. So, if you are 50, you'd have 60% (110 minus 50) of your investments in the stock market.
But no matter which rule you use to make up your plan, the older you get, the more you want to move your assets away from the stock market, preserving the gains you've made. If you have a 401K, add to it regularly. If you are new to the markets, start with a mutual fund account. There are many good ones, but if you only have limited fund, I recommend TR Price as you can get started for $50 per month.
Once started rebalancing is important, or if your administrator allows, automatic quarterly rebalancing, annually changing the percentage by one percent more into safer assets when the market is up. Some people try to even maximize this simple adjustment to sell (realize gains) at the top of the market for the year thus adding to performance as well as adding small amounts to their retirement account if the market moves down or even not rebalancing in down markets till a bottom is seen. In this way, you have no option but to buy low and sell high. I say, “Always buy and always look for an opportunity to sell.”
One of the biggest mistakes research have found in the data indicates that individuals tend to bail out of the stock market closer to bottoms than to tops. Making a plan avoids this temptation as most market timer’s performance has usually not played out particularly well. But simply following a plan is not a guarantee of profits over the long run. In fact, the only winning plan, when computer look over long periods is the rule of 100 above: all other plans fail.
The stock market is a forward-looking investment instrument, meaning that it starts to rebound well before the economic data show that things are getting better. Moreover, it is usually at the depths of economic difficulty where the stock market starts to rebound. So, as tough as this period has been for the long-term investor, there are ample reasons to stick with the rule of 100. This long-term plan includes a large role for the stock market but also wants you to invest in other assets.
Write to Dave Kansas at dave.kansas@wsj.com
Replies to This Discussion
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Permalink Reply by Kevin Espeseth on -
Excuse me for sounding like a complete buffoon about this, but (from my perception) you are talking about the hydraulics of the "stock market machinery", not the control(s).
One, of the primary capitalization traps that these people use to "percentage" your money is to get the investment public to concentrate on -just- the figures involved in the exchange process, deliberately hiding what the specific money is to be used for.
All morality aside, this is how the market (recently in particular) has so many bubble and busts. When the business involved produce product that is effective for the public, the market is good. When these companies stop developing new concept, and turn to profit taking, the market collapse.
Until the money flow can be restructured form this central method of control, and back into -much- more local recircularization, this opportunistic and unstable environment will continue to exist. The intermediate sized manufactures need to be developed -substantially- for this to occur. As a nation (in particular) we need to become -again- a product to customer production objective.
One, example:
In WW 2, the economy went from depression, to -very- healthy, by the massive movement of money within the country to other locations (within the country) and around again, many times, to many locations. What we did with the "product" (basically mechanical devices) was just give them away to other countries. Hell, we even provided shipping.The key here was that we actually produced material, and that material was the measure of value in the exchange.
Currently, value is whatever a -very few- people want to say it is.
The proof of this can be found in my advertised concept of "Free trade for CLEAN energy" (see my page for details). This single suppressed right in commerce, corrected, to allow ALL individuals to compete in the world energy market will breach this "tobacco company mentality" for good, with a market that will not bubble bust again.
Essentially we "carpet bomb" the developing countries with -CLEAN- energy production housing product, spend the money within the country (over and over again) in the new companies that are supplied with low cost energy sold to them by local suppliers, to make energy generation equipment, to supply more energy (and all that that implies).
Retirement? All you have to do to engage in this process is sign a contract to live in the energy production facility (home) until the low interest loan is paid off (very low interest, because the loan is secure / possibly automatic), and call the company repair man if the equipment warning lights go on / off.
Real complicated ain't it?
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