I don't know if anyone's tried to rank the words investors least like to hear, but contagion and capitulation have to be, I would think, somewhere near the top of the list. Both were bandied about on Friday. Capitulation because of the big down draft in stock prices and contagion because of Hungary's debt woes.
I spent a good part of the day Friday glued to the TV set watching the hysteria build on CNBC. By the time Maria Bartiromo came on, it was at a fever pitch. She ramped it up a notch as she's wont to do by screeching that it's the President's fault because he had promised the market a good employment report at his press conference earlier in the week. Huh? She said the President had said he would keep his boot to the throat of BP. Huh? I watched that press conference; and as I recall, a reporter had asked the question in those terms and the President had said he wouldn't phrase it like that. Apparently, hysteria on CNBC knows no bounds. Look up Rick Santelli in the dictionary if you're not convinced.
According to Ms. Bartiromo, the President had gotten investor's expectations up and apparently was responsible for the disappointment experienced when the numbers were released. All I've got to say is that investors moving in and out of the market on the basis of one economic report deserve what they get - good or bad. It isn't investing, it's speculating. Unfortunately, most viewers probably don't know the difference between the two and are getting whipsawed by Ms. Bartiromo, Mr. Santelli and their ilk.
All of this provides a teaching moment. In calm times, it is not as easy to get people's attention. Investors, as opposed to speculators, do a lot of work on their asset allocation and arrive at an allocation appropriate to their goals, risk tolerance, capacity to take risk etc. Investors recognize that there will be periods like now. Investors understand that a key is to not let emotions rule their investment decisions.
Investors recognize that the current market environment means different things to different people. Younger investors should have their buying hat on. This is why they hold bonds. At this point they should be thinking of incrementally reducing bonds and adding to stocks. Older investors, who have more assets than they need and plan on leaving a sizeable inheritance, should be of a similar mindset. For those tossing and turning at night and generally afraid to look at their account, you may want to think about putting 5 or 10% into bonds (actually bonds have done great in this market).
The point is to concentrate on making rational, non-emotional decisions. Waking up at 3 am and going on line to sell everything you own typically backfires.
On the contagion issue, it is possible to hyperventilate imagining the whole world defaulting. Recall that this first became an issue in 1997 with the East Asia crisis. Contagion in that episode eventually spread to South America. The important point is that it was contained and followed by strong markets.
Disclosure: This is not investment advice to any specific individual but is the opinion of the writer and is intended only for instructional purposes. Investors (and speculators) should do their own research and consult with an investment advisor before making investment decisions.
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