Friday, May 02, 2014

What? No Blood in the Streets? None of My Blood? Maybe We Should be Selling.

The Wall Street Journal Today headlines an article “Retirement Investors Flock Back to Stocks: Equities Account for Highest Percentage of new Contributions into 401(k) Plans Since Crisis.”   The article reports in part: 

Individual investors, notorious for mistiming the market, didn't fare well in the financial downturn. At the stock market's peak in October 2007, investors put 69% of new 401(k) contributions into stocks, according to Aon Hewitt. The S&P 500 went on to lose 57% of its value by March 2009.

Some financial advisers now worry that retirement investors could be late to the game, pouring into stocks after much of the easy gains have already been had. This year, the S&P 500 is 1.9% higher, but it is 0.4% off its record high hit at the beginning of April. By comparison, in the first four months of last year, the S&P 500 was 11% higher. 

A friend of mine and I had our portfolios in a 55% equity and 45% fixed-income mix as the crash approached.  When it occurred, he sold his equities in large part because of fear that the market would never recover.  Under the discipline that Investor Solutions applies (our representative is Rob Gordon), we bought equities to restore our 55/45 allocation.   We rode back up when the market improved.  My friend’s portfolio did not.  Our overall return since the crash is about 4.2%, after all fees.

Russia’s stock market is down.  Everyone is getting out of Russia.  We have a very small allocation to Russia through one of the index mutual funds in which Investor Solutions has us invest.  As to the very small allocation, we are buying Russia.

This quote from the Investopedia website gives you the flavor of that investment approach:

Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, is credited with saying that "The time to buy is when there's blood in the streets."

He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that's not the whole story. The original quote is believed to be "Buy when there's blood in the streets,
even if the blood is your own."

This is contrarian investing at its heart - the strongly-held belief that the worse things seem in the market, the better the opportunities are for profit.

Most people only want winners in their portfolios, but as Warren Buffett warned, "You pay a very high price in the stock market for a cheery consensus." In other words, if everyone agrees with your investment decision, then it's probably not a good one.

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