Many investors began the year with great hope that this would be the corner we were all hoping we would round. Markets were poised to go higher and that belief spurred some interesting volatility. But stock markets are very fickle mechanisms, designed to frustrate the experts and befuddle those who are not. And now that half the year has ended, the whole of the economy seems poised to, well, let’s put it this way, do what is least expected. And yet, we should have expected it all along.
There has been a basket of economic news that was not received well by those who see the stock market as the main wealth generator, perhaps all that is left for most. But when the thought of staying in a marketplace that has disappointed and thrilled, all in the same week, most of us become understandably skittish. We have seen the second quarter of 2010 create nothing but trouble with the Dow Jones Industrial Average falling 6.27 percent (and poised to go lower).
The question is not how low it can go but what you can do. The ugly news forcing buyers to become sellers has been in the background, much like the vuvuzelas of the 2010 World Cup all along. And like the droning sounds of an approaching insect swarm, we have been little fazed by the noise. Annoying yes, but until we are actually in a position where we can’t ignore the noise do we try to run for cover.
In the U.S., the jobs number released this morning only added to the mounting pressures. From the private sector, the one that is supposed to create jobs and get the ball rolling, the disappointment was most noticeable with only 83,000 jobs created in the past month. Even as the unemployment rate dropped, due to the loss of unemployment benefits to thousands of workers, the lack of interest in taking a risk, any risk, put thoughts of a double dip recession on the minds of most investors.
Should the problems of a global proportion have any impact on what you do with your retirement accounts? Only if, and this is a big if, you are retiring this year or next. Otherwise, look at it this way: few of us get another chance at buying what in normal times would be considered a great purchase for less than what it is really worth.
The stock market is built on buyers who believe that something good is about to happen or will continue to happen, and sellers who believe that whatever has happened will make their original decision to buy no longer viable. When sellers sell, the thinking goes, they know something you might not. When buyers buy, on the flip side, you believe they know something you that you should know but do not.
This creates the herd mentality often seen in euphoric run-ups and disastrous sell-offs. You know they know something and based on what you know and don’t, you follow. You can’t rely on your stand-alone judgment to determine whether the problem is real or imaginary. You follow the herd and run from the danger even if you are unsure of what the danger is.
History is filled with instances where those who waited to see what was happening and who perished unnecessarily. Jeffrey Kluger wrote about this in his book Simplexity when he suggested that we are always trailed by danger in some form in part because we are not so good at distinguishing long-shot risk from those that are the most likely. He points out one example of how we fear mad cow pathogens in our hamburger but ignore the cholesterol; how we worry about shark attacks at the beach but forego sunscreen.
So when the market offers us a buying opportunity—remember a seller may or may not know something, may or may not be simply taking a profit or may or may not have bought erroneously at the top and now recognizes their mistake—do we see it for what it is? Do we move against the herd or do we run with the pack? It is no easy decision to make.
