The purpose of investment and speculation is to seek maximum total return, consistently, while minimizing the potential for loss. And as bad as 2008 may have seemed to be, this should still have been our goal. Yes, even in a recession, or bear market, or any other economic downturn. To what degree we achieve this (or not) is going to vary from person to person depending on the decisions we make.
When the market turns bullish and the economy starts growing we buy stocks to profit from the rise. No problem there, because we are following the trend. We all know the trend is our friend. Our chances for success will be in our favor that way. With that said, when the market turns bearish, and the economy slows down or turns negative, we should not seek stocks to buy for a rise. Too bad most people’s retirement accounts are set on auto pilot to continue buying, and losing money, in the name of dollar cost averaging (I’ll blog more about that and other do’s and dont’s in a later post). The problem with this is now the market and economy has turned, and you are trading against it. Against the tide. And your chances of trading for a rise in price, successfully, has turned in to a mere gamble. It’s like pissing in the wind. Odds are, you’re gonna get wet. So Whats the answer? Stop trading out of season. Always trade in season, never trade out of season. I can’t stress that enough. In times of a market and economic downturn, we should be shorting stocks if we are advanced enough to do so. Riding them down for a healthy profit by following the down tend. If not we should look for alternatives that tend to go up when the market’s primary trend is down. Such as cash. You can always tell that cash is going up in value when commodities and assets in general are going down in value (deflation).
However we are seeking maximum total return. So we may want something with a better return than just sitting in cash or money market accounts. And a good alternative in times like these are debt instruments. Like bonds. It could be said that bonds are the competitor to the stock market, to some degree. When the economy is growing at a good pace, money flows in to the stock market, and rightfully so. In those time, it’s the best thing going; it historically gives you the best return for your money. But when money flows out of the market, a good place to park it is good old bonds, for a good safe return on your money, while we weather the storm and wait for the time to put it back in the stock market.
The easiest way to do that it to put it in a bond fund. For atleast the past 3 months to a 1year, PIMCO has offered some of the best returning family of bond founds out there. PIMCO Extended Duration Fund (PDEIX) has had a return of 49% in 2008 http://finance.yahoo.com/q?s=pedix&d=t.
In summary, for this ressecion, you should’ve been shorting for the past year, or if you just needed somewhere to park that retirment money, bonds are the way to go. But before making any moves, always do your home work, and be ready to change when the primary trend does.
