Vigilance At A Premium

It seems like vigilance is at a premium. If you're a long term investor, you're probably raising an eye brow and wondering what you should do with your money. People have been selling frantically the last couple weeks and the market has taken a sharp drop. The money has come out of equities and been shoved into fiat currencies like gold and to a lesser extent silver. At the same time, oil and copper prices have fallen, while the US dollar has gained on the Euro as greater concerns arise in Europe.

So what do we make out of all of this? Do we follow the experts and take our money out as well?

I don't think you can panic sell. Cutting your losses seems like a mistake when you can hold and accumulate higher dividend yields and reinvest them into more stock, which will increase in value as the stock recovers. If you sell, you're letting your losses stand.

You're probably also worried about this credit downgrade. I don't think it's necessarily a bad thing. Here's the bottom line:

Neither side can easily claim the high ground. The downgrade laid bare a distrust of both the Washington political system and the independent firms tasked with standing in judgment of it. Ultimately, investors are likely to be responsible for deciding who has more credibility.

The downgrade was down to one thing: democracy. Because of the quibbling between the two parties and the time it took for the deal to get done, S&P felt compelled to downgrade.

The Obama administration say it's down to an accounting error, and while that may be the case, I still don't think this is a bad thing. At the very least, it will make them work that much harder to address the debt situation, so we can get back the AAA rating. In the meantime, do you really believe that the US will default on their credit now? You think not having that rating means we're less likely to pay off our debts? We came close, but we got the deal done. Are we going to not do that next time? In the end, these people know the importance of paying off our debt. They're not complete idiots, though they may seem like ones at times. I'm not saying that the rating downgrade is meaningless, but it doesn't mean as much as it is made out to be.

You can remain calm about it.

Burton Malkiel had this to say in this morning's journal:

Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong. We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility. Over long periods of time, the U.S. equity market has provided generous average annual returns. But the average investor has earned substantially less than the market return, in part from bad timing decisions.

My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios. If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did.

The US market has grown over time. To not be in the market is to miss out. To cut your losses is to miss out.

I think we're getting into the time where it's time to buy. Listen, over the past couple weeks, some of the best stocks have declined with the markets, coming off highs as a result of solid earnings reports. I see this as more of an opportunity to get these stocks on the cheap than an opportunity to sit on your hands. Fundamentally, these companies are still doing well and there's a reason that they were as high as they were. Now the shares are more affordable. You've seen the upside they have when things are normal. The last couple weeks, everything has fallen save for gold mining companies. Find a company you like and think has a lot of upside and dig in.

I'm a soon to be buyer, not a too late seller in this current market. I'm vigilant. I don't think this is going to get much worse. To think that this decline is the end of the world is short term thinking. You can't let volatility and declines get to you in the short term. You need to let it ride in the long-term. I am still a bull on America, as hard as that might be to be right now.