October 12, 2008

Are We Hitting the Bottom?

There have been several questions e-mailed to me over the past couple of weeks, and one that continues to be asked is "Are we hitting the 'bottom'"? There is one thing that I have learned from reading history books, economic books and articles, and listening to people... the bottom is never "the bottom" until a few months later.

In October 2002, the market hit "the bottom", but no one knew it until 3-6 months later. The reason is pretty simple to understand but hard to see.

We have all heard the expression "he can't see the forest for the trees", and this is the perfect time for it. It is relevant here because all of us see only what is in front of us. We cannot tell if the market's last drop will be the last one or if we should head for the door.


If we look to history, it will tell us some about "bear" markets:
  • March 2000 to October 2002 (somewhat long) - Decline of 49%
  • August 1987 to December 1987 - Decline of 34%
  • January 1973 to October 1974 - Decline of 48%
  • November 1968 to May 1970 - Decline of 36%
Our current bear market from October 2007 to present leaves us down about 42% from the high. Thus while we may not be at the ultimate bottom, we are somewhere near it.


The next few months could be choppy in the markets, or there could be the "V" bottom that sometimes happens. The main thing to do is keep your emotions in check and have your allocations at what you feel comfortable with. If you sold some assets (hopefully not all) to cash because you are worried, look to keep it, and slowly put it back in. Going all in may be brilliant or it may not, so the diversification and long term aspect is something to remember when markets start to act crazy in the future.

Let me know if you have any questions.

No comments: