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I Never Thought It Would Get This Bad

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By

Bruce Jackson

From the Fool blog

Local Police Station Is Useless!

0

Jane Baker
21 November 2008

Published in Investing on 7 October 2008

Was yesterday the day stock market investors across the globe capitulated? It was very painful. Vast amounts of money have been lost, never to be regained. Should you sell up and give up on the stock market? Hell no.

I made a huge mistake yesterday.

In fact, I’ve made many huge mistakes over my 20 year investing career, far too many to list in the space of such a short article. For that, I’ll need a few more bytes, and you’ll need to set aside a lot of time to read about them all.

My mistake of yesterday was to look at my portfolio right at the absolute bottom of the massive Wall Street sell off last night.

I should have gone to the movies. Or watched TV. Or had a large glass of scotch whisky.

A large portion of my portfolio is invested in US shares. The US is the home to many global leaders, especially in the technology sector. I’m talking about companies like Microsoft (Nasdaq: MSFT), Google (Nasdaq: GOOG), Cisco (Nasdaq: CSCO) and Amazon.com (Nasdaq: AMZN) to name a few.

My Timing Was Abysmal

I couldn’t have timed things any worse. When I looked at my portfolio, the Dow Jones Industrial Average was down a whopping 800 points, an intraday record points drop.

As you can imagine, my portfolio was a sea of red. Some of my smaller stocks were down 20% on the day, and that’s after they’d already been decimated in the preceding days, weeks and months.

The initial shock was somewhat sobering, to say the least. It’s not easy seeing a decent chunk of your total wealth evaporating before your very eyes. There was some relief towards the end of the US trading session, with the market rallying during the final 90 minutes. The Dow eventually closed down about 370 points at 9,956, and all was calm again.

And that came after here in London the FTSE 100 index chalked up its biggest ever one-day points fall, plunging 390 points, or 7.85% to close at 4590. Needless to say, it’s a long, long, long, long way from its peak of 6930 all the way back on December 31st 1999.

Motley Fool Confession – We Were Wrong

Here at the Motley Fool, we’ve long held the twin views that…

1. The stock market offers the best opportunity to your increase your wealth.

2. All stock market investments should be viewed as long-term in nature, the longer the better.

Based on the performance of the stock market over the past 10 years, you’d have to say we were wrong on point number 1. Over that 10 year time period, as I write today, the FTSE 100 index has been roughly flat, not including dividends.

On point number 2, 10 years for little capital return is obviously pretty dismal. How long is long-term? We’ve previously said 3 to 5 years, preferably longer. You’d have to say we were wrong on point number 2 too.

So should we sell up and give up on the stock market?

Hell no.

Many investors make the twin mistakes of buying high and selling low. If their one and only buy was as the clocks started counting down to the new millennium, and they sold today, they’d have lost a lot of money.

I Retain Faith In The Stock Market

Please tell me that’s not you.

The other long held Motley Fool view is that of pound-cost averaging. In short, by investing regularly in the market, you actually do better when the market has major lurches downwards. [Read more here.]

These are extraordinarily difficult times. The rule books have been thrown out of the window. Measured right now, at this moment in time, The Motley Fool has got it wrong.

Yet I retain faith in the stock market and the capital markets. They’ve recovered before and they’ll recover again. Myself and The Motley Fool retain our views that the stock market is the best home for your money, over the long-term. We hope you do too.

The Point Of Capitulation?

The big question on most people’s lips is, “Was yesterday the point of capitulation?”

Was it the day when people finally gave up on the stock market, selling out to at least preserve some wealth?

It was definitely a day when margin-related selling was rife. People who’d borrowed money to invest in the stock market saw their shares automatically sold away from underneath them, regardless of the current share price, regardless of the underlying value of the company.

I’m not about to attempt to call the bottom in this market. I’ve said a few times I think we’re close to the bottom, but I’ve been wrong – we’ve fallen even further, especially yesterday.

I suppose if I keep saying we’re close to the bottom, I’ll be right soon. But this is unchartered territory, not just for me, but for every person alive today. The global banking system is frozen stuck. Banks are falling faster than you can say “I wonder if my money is safe?”

The Day When Complete & Utter Fear Ruled The World

Yesterday was a day of capitulation. It was a day when fear ruled the world. In most cases, there was a complete dislocation between the share price and the underlying value of the company.

In ‘normal’ circumstances, I’d say yesterday was the bottom, and now is the time to buy shares in quality companies trading at cheap prices. Sadly, these are not normal circumstances.

That said, in my opinion, now is not the time to abandon the stock market. It may fall another 10%, 20% or 30% from here. It may jump 10%, 20% or 30% from here. More financial institutions may need a government bail out. Uncertainty remains.

Your Health Is Much More Important Than Your Wealth

I always like to conclude on a positive note. Despite the stock market losses, if you have good health, that’s much more important than good wealth.

Money can’t buy happiness. It can’t buy health. This period of complete and utter pessimism will pass. Over time, many people will be able to rebuild their wealth.

In the meantime, hang in there.

> Worried about your savings? Read The Safest Accounts For Your Savings and then compare savings accounts at Fool.co.uk.

> Of the companies mentioned in this article, Bruce Jackson has a written down beneficial interest in Microsoft and Google.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

LastChip 07 Oct 2008, 10:59am

At last; first I see Emma floating the idea that owning a property may be about a home, and not just money. Now finally, we see a Fool writer admitting the stock market over the past 10 years has been for most (ordinary folk) nothing short of a disaster.

The bottom line is, you would have been better off putting your money in a high interest building society account, than playing in the stock market. At least you would have seen some growth.

It's not only about personal cash either. Practically all pensions are tied up in equities. How long before we see all the pension providers laying the ground to tell you your pension is virtually worthless?

I repeat, that which I have written elsewhere. The past is *absolutely no guarantee* as to how the investments will perform in the future. The world is changing and you cannot assume anything.

I will also repeat yet again; maintain control of your own cash. *Don't* pass that control to others.

How many times does it have to be said?

Fortunately, most of my own investments are tied up in cash ISA's and only a relatively small proportion of fun money in the stock market. And damn glad I am too!

You guys and gals at the Fool have a huge responsibility to your readers. Many that read your articles are not sceptical old farts like me, but believe every word you say. Take a step back and rethink. Don't just tow the party line. Further, consider the vast majority of your readers will not be higher rate tax payers and therefore will probably need a very different strategy to you. Come down to the real world and try and help those that most need it. It's very rewarding, not in monitory terms, but in personal satisfaction.

I think we may be witnessing an irreversible change in the way finance operates. What that means in real terms, I don't know, but what I am reasonably sure of is, these various government initiatives are not going to work. Market forces are greater than even collective government power (remember the exchange rate mechanism?) and it's doomed to fail.

Where we go from here? I wish I knew!

cr0bar 07 Oct 2008, 11:16am

Over the long term, the stock market, with dividends reinvested will always beat cash. You should simply do as the Fool advises, invest regularly and for the long term. Over 30 years a tracker will likely return around 10% per year. Over 100 years the stock market has returned this figure, so that includes the great depression and two world wars.

Don't panic, now is not the time to sell if you don't need the cash and own large reliable companies or a tracker, unless you think the current crisis will be worse than WWII and the great depression. Crises always come and go, but stocks have never performed worse than cash in the long run.

MonsterMixer 07 Oct 2008, 11:26am

I agree with the poster above. The idea that the FTSE follows some kind of generally log-linear path upward is absurd, as is the notion that current dividend yields and company valuations can be maintained in this environment.

The FTSE is down approx 5-10% on its level 10 years ago. That's not a particularly bad performance really, certainly nothing to get worried about.

uncut1 07 Oct 2008, 12:02pm

Last chip strikes a very pessamistic tone.

Perhaps that in itself is a buy signal.

When there are no sellers left that is usuallly the time to buy.

I have been cautiosly adding to banking and consumer realted stocks since mid July.

I think the current market purge will drive out a lot of the short term speculative practises that have lead to such irratic market behaviour over the past ten years.

Perhaps a return to real investment based on fundamentals will result.

CunningCliff 07 Oct 2008, 12:33pm

MonsterMixer, in recent days, you've shown signs of being slightly bullish. For the record, I view this as a buying signal. Phew, some relief at last! :0)

Cliff

LastChip 07 Oct 2008, 12:36pm

I've always believed everyone is entitled to their opinion and that is what makes a thread like this so interesting.

I do not see myself as being pessimistic, but I do try and keep my feet firmly on the ground and never more so than when everything around me is crashing to the ground.

In fact, only last week, I was in the market buying what I considered to be a good value solid stock with a high yield. Crap timing! But I reiterate, it's fun money and if I loose the lot, I'll be a little sad, but it wont damage me to any degree.

Keep in mind how much your investments have to rise to recover losses. The old adage, cut loses and let the profits run, has never been more pertinent.

The point I would like to emphasise is, don't take the past as being gospel. Open your eyes (and your mind) and look at the real world as it is now. Then consider what it may be like in 5-10 years time.

Remember, the governments (of all shades) answer to everything, is more regulation. They'll all cry, "we can never let this happen again." So the financial world in the short/medium term, could be a lot different to now.

AlanMad 07 Oct 2008, 12:56pm

lastChip - while I see your point, I think you are being overly harsh on the Fool. There are many people out there who's lives have been changed for the better forever due to the Fool. I still remember the day when i came accross a small little book that simly and utterly changed my life. "How to invest when you dont have any money"... Brilliant.

I think the key message behind all the Foolery is to get the point where you are actually handling your own money affairs and not leaving it to others - or going 'osterich' etc. Investing in the stock market via a tracker has yielded superb returns for me and i'll continue to carry on with the same strategy now. I havent bought for almost 18months now (call me a sceptic but it was obvious the bubble was going to burst at some point) and i think the next few months will start to once again look interesting for jumping in again for a monster purchase.

Right now though, i still think that we havent see the low point yet - it will peak and trough some more, but hte low point is still a few months off. Hopefully. :-)

MonsterMixer 07 Oct 2008, 1:06pm

Cliff,

Thanks, I certainly think that certain small-cap cash-rich companies are undervalued right now, but at the moment I'm more overweight in non-cyclicals with global exposure.

One of the stocks I hold is one I note you have in your profile - GSK. It's held up OK recently, but think it will continue to outperform with flight to quality and improved earnings through currency movements.

Not keen on cyclicals still and think maybe there's a few more moves down yet before we get a bottom.

I'm worried medium-term about deflation, but notice that global central banks have started to sit up and take notice. Aussie cut 1% yesterday, and UK should cut by 0.5% to try to pre-empt this.

I haven't made it a secret that I've been pretty pessimistic about shares for a while, and still think risk-reward is evenly balanced here. To be honest, I'm a natural pessimist, which sometimes isn't a bad thing.

Still keeping an eye out for that LNG Q3 update :) ... Keep meaning to look closer at their cashflow, but haven't done yet.

afrps 07 Oct 2008, 1:14pm

My take for what its worth

1. most industry is just as sound as it was before
2. the banks have ducked and dived for too long and now they have done that much fiddling with the figures that they don't know what they or each other really have
3. because of 2 they dont trust each other

Think thats all fairly obvious to everyone

4. every time they cry wolf the government digs deeper into their pocket and lends them a few bob

5 . the banks have worked that out and they are now on begging for cash just to put in their coffers - then lend to me and u

No 5 really stinks though....We lend the banks cash through taxes , then they charge us to borrow it back and the bank bosses get bonuses out of it

jerryrc 07 Oct 2008, 1:39pm

Interesting mix of views, I prefer investor John Bogle's assessment:

that long term returns on stocks equal dividend returns + profit (and hence capital) growth. Any deviation around this long term norm is down to speculation (i.e differing p/e ratios applied to those profits).

For those that point to stocks not having moved for 10 years, look at profits growth instead, which of course have been positive since then (i.e business did in fact work over this period !)

Profits will suffer in short term, but as long we think capitalism still works profits will grow in the long term, ergo stock prices will grow too.

TMFVertigo 07 Oct 2008, 2:31pm

Hey Bruce.

You're being harsh on yourself and The Fool. I totally understand your anguish; we have influenced many thousands of people over the years, many of whom may now be worried about their investments.

However, we have never said that investing in the stock market was 100% safe, even in the long-term. What's more, we have often shown figures showing that, whilst over five years shares have usually outperformed cash earning interest, it certainly hasn't always been the case. (Roughly 75% in favour of shares, but that means 25% of the time cash wins, too.) Furthermore, we have shown that over ten year periods shares have normally outperformed: around nine times out of ten, but that still means 1/10 times cash does better.

So we will not always win over ten-year periods, but the longer we invest the greater our chances of coming out better than those who simply save their money in such things as deposit accounts.

Neil (a Fool writer)

theoldone1 07 Oct 2008, 4:26pm

Hi!
I'm no financial expert but my take on this is as follows.

The history of finance is littered with booms and busts for all sorts of reasons including tulip b
bulbs, south sea investment etc etc. and I'm sure this will be no different. If you don't like this the alternative is a socialist govenment driven system and as anyone who has had any contact with these Governments will know this will sink in to corruption, old boys scratching other old boys backs etc etc.

However I would say that Dick Turpin only managed to rob at worst few hundred people whilst these latter day highway robbers(sorry bankers and financiers)have managed to rob thousands and then want us to pay for their robbery via the tax system.

What is hgappening now is what capitalism does best, as the system is correcting itself. Whatever happens on the stock exchange companies will still be making money and in reality what I am interested is the dividends, not what some hypothetical value the stock exchange may put on it. I suspect all the highs and lows we hear about are more about the fact that many investment compnaies make more money by selling and buying shares than in doing anything useful.

As Warren Buffet said if you're buying burgers do you want the price to go up or down. At the moment the Mr Market is selling burgers at ludicrious prices and so its buying time.

Also to quote someone else (whoes name I can't remember), if its the end of the world then however much money you've either got or not got doen't matter, however if its not the end of the world you're better buying when its cheap.

The people I really feel sorry for are people who are now approaching pension time and have to convert their accumulated sum in to a pension as the value is low and this will directly affect their pension income. However as someone who thinks that pensions are a diabolical deal done between the tax authorities and the insurance companies, to force you to save in crap pension schemes fortunately I've avoided this.

I'm sitting on the sidelines at the moment and watching this with great interest.

In the words of the hitchhikers guide, "Don't Panic"

The old one 1

AbleNorn 07 Oct 2008, 4:58pm

Not to worry, Bruce. TMF has always taught us before all else to think for ourselves and take responsibility for ourselves, and not to follow anyone's advice blindly - not even TMF staff writers'! And in terms of guiding us into getting a grip, and hosting all those discussion boards, it's certainly done a lot more good than harm.
Perhaps you're just too close to it all - you have to be, you earn your living from it. Me, I'm carefully not looking at my portfolio valuation at present, not that it's a very big one. So far as I am concerned, the longer prices stay down, the more time I have to save up to buy up some more before they all take off again - but if it weren't for TMF, I wouldn't be in a position to take this approach.

mackem1942 07 Oct 2008, 7:26pm

Please bear with me as I seem to start off-topic! The computer age is an absolutely wonderful age....except in one extremely important area i.e. the Stock Market. I am now retired having spent 32 years with Midland Bank and my final 2 years with HSBC following the takeover. In my final 2 years in banking it became pretty obvious that a new breed of "banker" was taking over....one that I and my fellow workers at the time did not recognize! This change also became apparent in the Stock Market where the old bowler hatted "my word is my bond" gentleman also began to disappear at the same time as the traditional banker.

What replaced both sets of workers in banking and in stock markets around the world was a set of people who would not have been out of place following the 3.30 p.m. at Newbury! Get rich quick merchants whose sole aim was to make as much money in the shortest possible time to "earn" their obscene bonuses, make fat "profits" for the company they worked for and thereby elevating the share price for the company's investors. But even that wasn't clever enough for some.......and so CFD's; short-selling; hedgefunds; lending to people the kind of sums that they never ever had a chance of repaying became the "norm"!

Where my starting comment about the computer age and, to me at least its detrimental effect on the stock market, comes in is that "positions" world-wide can be effected merely by pressing a button at the right time by any group of people who collude to bring about the "right" result for them.

I realise it is a naive view to hold these days but I always thought the stock market was there for people to invest any spare money they had in investing in companys that they thought would turn a profit.....the company got its capital for future progress and the shareholder was rewarded for his faith in the form of dividends. Old fashioned idea!?......perhaps!....but one worth considering again in the future.

At the end of the day you cannot make money out of money.....you have to manufacture and produce an item which someone is willing to buy in exchange for money. To me......what has happened over the last few weeks and is continuing to happen.......is the worst kind of "pyramid selling" I have ever witnessed........and the guys who started it have already long left the scene of their crimes with their ill-gotten loot!

mackem

guss123 07 Oct 2008, 8:53pm

I am a novice investor and yesterday I checked my bovespa portfolio it was 13% down in the day.
Normally I would get insane to loose that money in one only day.
I bought some more and I slept very well at night.

erpentz 07 Oct 2008, 9:14pm

I am very new to this crazy game and there is a lot that just does not make any sense to me or friends. All my savings have been sitting in bank accounts earning after tax and inflation - nothing. Now instead of looking at spreading cash between different banks, we look at spreading them between different countries in vain efforts to keep our hard earned cash from dissapearing from under our noses. How long have governments tried to reassure us humble folk that there is nothing to worry about?
I firmly believe that this is the time to move cash from the banks into investments but to be honest don't know where to start. Any ideas of trackers or funds would be most appreciated.

guss123 07 Oct 2008, 9:40pm

Hi Erpentz,

I think a cheap tracker is a good start
Fidelity All Shares has a low expense ratio.
Try to don't time the market, well I just did that yesterday, easy say dificult done, buy every month.

toadjust12 08 Oct 2008, 1:59am

I am concerned about HBOS.My wife and I jointly own more than the new limit;wE STUPIDLY SWITCHED SOME CASH INTO SAGA-which we have since realised that it was part RBS via Birmingham Midshires. Wealso have shares in A Halifax sharebuilder and have our Retirement and State pensions paid into our current Account.
Can anyone advise me about the shareholdings?Also should I change my Bank Account to prevent further possible leakage

ajooba 08 Oct 2008, 2:35am

toadjust12, I would say its not worth taking the risk of exceeding the limits. In your position, I would open another bank account. The limits, protection etc are all covered in complete detail [including what banks are part of the same group etc ] in http://www.moneysavingexpert.com/savings/safe-savings#protected.

However, if you have cash as well as investments(shares) in the same financial institution, I am not sure how it works.

Erpentz : yes, cheap tracker is a good start. Now is surely a better time than say early part of this year.

To everyone else and TMF : Yes, if someone bought 10 years ago and did not make any additional purchases, then sure they are sitting flat, but what if someone kept making dollar-cost-averaging ? Would they have lost as well over the last 10 years ?

On a more general question, consider all [N year windows] over last 100 years, and dollar-cost-averaged every month for M years into the window (M < N) and then the investor slowly eases into conservative investments switching to 100% cash at the end of the N year period. Say N=15 and M=10, how does the data look like for the FTSE AllShare tracker ? I could probably do an excel spreadsheet to get this data. Or, if anyone (TMF) have access to this data, that would be great.

Why just restrict to FTSE ? What if we had a "lazy portfolio" covering all international stocks as fundadvice.com advises ? Say 30% US, 30% Europe, 20% real estate, 20% emerging to start with. And then slowly ease into bonds and cash as you approach retirement. I would really like to see data.

LastChip : For me its not about play money. If its play money, I wouldnt even bother wasting time reading the Fool. My main interest is to beat bank savings accounts and inflation over a "long" period to invest a significant chunk of my wealth, and past data seems to support shares and property to be able to get you there.

ajooba 08 Oct 2008, 2:39am

Google for "lazy portfolio" : Paul Ferrell of CBS marketwatch has plenty of very simple ideas that get you 9 to 10% per year and not significant damage if the market tanks.

There is also a "Dimensional Fund Advisors" started by Eugene Fama, Nobel Laureate and proponent of Efficient Market Theory at Chicago GSB. Based on index funds covering various asset classes. They must have some type of data. Again, past data does not predict future, blah blah ....

churchill123 08 Oct 2008, 8:09am

Soros has been heard telling investors 'stay away from banking stock for at least 20 years'!

Nonsense.

I've been slowing buying into HSBC since about 1997. They're not over leveraged; haven't borrowed beyond their deposits. By the time this gut churning volatility has run it's course I'm fairly confident that HSBC stock will be outperforming other UK based banks, and may even snap some other retail banks up yet.

GrahamMiller0 08 Oct 2008, 8:10am

Is it me, or does anyone else think that these selling frenzies are deliberate attempts by the financial institutions to bully the Government/BofE into bailing them out some more?
Personally, I think that we need more accountability!

pdcovers 08 Oct 2008, 8:51am

Some shares go up, some shares go down. If you can't stand the heat get out of the kitchen.

lurker3 08 Oct 2008, 9:11am

In 25 years of investing I think this is the worst situation there has been.Ut is not the fluctuation of the markets but the fact that in the last ten years they have only risen by 20-30% including dividend reinvestment and have seriously underperformed cash.One has to ask where the increased wealth has gone,perhaps to hedge funds,perhaps to senior executives and investment bankers or perhaps in taxation but it certainly it hasn't gone to the small shareholder.

cbpower 08 Oct 2008, 9:35am

You have to laugh or you would cry.
I first invested directly in the stock market (as opposed to money invested via pensions etc) in early 1987 just in time for the October crash. Black Monday was my birthday, luckily I was younger then and had less money so didn’t lose too much.
I next invested in late 1999/2000 and managed to time the tech bubble perfectly, I lost a lot more that time. My best investment was £6000 in Marconi reduced to £0, happy days. As a side note my friend bought and Aston Martin around the same time, I think he lost less on the depreciation that I did in the market plus he had the fun of driving it.
My next investment was in 2007 and it looks like my timing is perfect again. £6.50 for the RBS, now 90p, could easily go belly up.
Luckily I only invested money I could afford to lose but have decided that direct stock market is not for me. I have read the books, Graham & Dodd Security Analysis, The Intelligent Investor etc but obviously not understood them.
I have been wondering about the saying that the stock market is the best place for long term saving. I have a pension, which I have had for 13 years; you get to choose cautiously managed funds like stable value, global equity and UK equity etc. Looking at the numbers the best performing fund over the 13 years is the stable value fund and the return is still worse than you would get in a good deposit account. The only reason I keep it going is the company I work for contributes so that does help the returns. I have also been buying ISA’s for the last 9 years and they are mainly index trackers. Looking at them yesterday I appear to be in the red with those so I have lost the 9 years interest I could have had on that money. I feel it will be a long time if ever before I match what I could have got if I left my money on deposit.
So I ask myself how long do I have to leave my money invested in the stock market to beat the rates I get on cash, so far 13 years doesn’t see long enough.
My best investment has certainly been my home though it is not a very liquid investment. I have also done well with just cash just moving it around to the highest paying accounts. Though even this is getting difficult, looks like my money with Icesave will be out of circulation for a while and I feel KE is likely to follow but will leave my money there since it is below the threshold.
We live in interesting time.

tomatosoup 08 Oct 2008, 10:33am

For years I've been sitting back thinking "I'm alright, Jack", because I have a fully index-linked pension from British Airways to look forward to. The fund (The old 'APS' fund from pre-privatisation days) was always very healthy, to the extent that BA have not had to make any contributions to it for a long time. But now I wonder how long it will be before I get a letter saying "Dear Sir, you know that lovely dosh you've been expecting? Well you ain't getting it!"

gordonbanks42 08 Oct 2008, 11:19am

ajooba: I like your idea - pound-cost averaging over 10-15 yers with a bit of "lifestyling" thrown in at the end is a pretty sensible "vanilla" strategy and provided you use total return numbers you'll get a fair comparison against cash with interest reinvested. I would be willing to bet a modest sum that a large number of the windows where equities underperformed cash on a straight end-to-end measure would outperform on the basis you suggest. Come to think of it I have already imvested an immodest sum in such a thing because I am pursuing a very similar approach for real, and have been doing so for some time ;-)

About the nearest I get to market timing is to turn the wick up and down a bit on my monthly pension (SIPP) contributions. I just turned the wick up - by about as much as I would ever be willing to do.

LastChip 08 Oct 2008, 11:33am

OK; to take a couple of comments directed at me.

First, I write what I believe and I don't expect everyone else to agree. I do hope however, as I consider all your posts, you will give me the courtesy of considering the contents of mine.

That said; AlanMad, I don't disagree with you. The Fool has probably done more than most in educating people to look after their own financial affairs - and that's great. All I am saying is, (sorry to repeat it) the past is most definitely not any guide to the future. Now may be the time to reappraise conventional thinking and really try to look to the future and how it may all pan out.

Further, if you have money to invest that you really cannot afford to loose, then in my view, the stock market is not the place to put it.

To mackem1942 - (not directed at me). I agree 100% and can relate absolutely to your post. Until something is done to rid the system of these idiots, it remains a crap shoot.

To ajooba; I refer to fun money to mean, that which I can afford to loose. The first rule of stock market investment in my view. Believe what you will, but Paul Ferrell must be some sort of genius. Most professional fund managers can't achieve 9-10% per year consistently.

SirRalf 08 Oct 2008, 12:46pm

Remember the golden rule: Buy when everyone is selling & sell when everyone is buying....

billyboy121 08 Oct 2008, 5:06pm

the oldone1 'someone who thinks that pensions are a diabolical deal done between the tax authorities and the insurance companies, to force you to save in crap pension schemes fortunately I've avoided this.'- i've not been in the pension arena too long but having been interesting in stocks for longer, i've come to a pretty similar conclusion. it's the same muppets running the pension schemes as running the funds. the only benefit with pensions is the tax rebate, but that's small consolation if they manage to lose your cash through dubious investment strategies. I'm seriously considering moving to SIPPs now (well seriously thinking about considering it, still have v little knowledge on that area)!

ajooba 08 Oct 2008, 9:58pm

GordonBanks42 : Thanks for your note. On the pound-cost averaging and easing into more conservative investments slowly topic, I wish the Motley Fool would help us some data / statistics. If I learnt anything about stock market, it is thanks to the Motley Fool. But unfortunately diversificaton is a subject that I have not read much about in the Fool. I could work up an excel spreadsheet or a small computer program but I guess wouldnt be able to calculate "dividends reinvested".

Paul Ferrell is not a genius. He was only telling everyone about Wall Street's best kept secret. Variants of this can be found in Scott Burns, William Bernstein (Intelligent Asset Allocator) et al's work. Suggested google searches include lazy portfolio, coffeehouse portfolio, couchpotato portfolio. I am not making these up. A lot of do-it-yourself investors in America have adopted these approaches so they can get on with their lives, spend just a couple of hours a year on investing, and still get bank-saving-accounts beating returns *consistently*, but not necessarily double-digit returns.

unfortunately many in UK seem to have not heard of it (judging from my conversations with work colleagues). Indeed the Motley Fool UK site also does not focus share investing so much as bank savings accounts etc on their webpage unlike the US site. Perhaps it is a cultural thing, I dont know.

LastChip : regarding "afford to lose money", I hear you, but I feel thats applicable only when you buy individual companies. When you are capturing the whole market, I would use the phrase "afford to lose money in the short term".

Suppose I have saved some of my hard earned money, say a lumpsum of $50,000. Out of this I want to set aside say $40,000 for emergency payments and I am willing to lock away $10,000 for 20 years, say for a child's college education, which is the example they use in America. Whats the best way to make this money work for you ? Is it under the matress, or in a bank savings account and keep paying 40% of the interest per year to the taxman ? I believe it is in a basket of well diversified stock market / real estate based portfolio, to beat inflation and pathetic bank interest rates (especially after the 40% tax) Basically capture the whole world economy, dividends and all. The only time this wont work is if we have a nuclear war, alien invasion or meteor attack, but then if that happens, money wont help us anyway.

HenryScottTuke 09 Oct 2008, 9:25am

An equation to lessen the sickness on your losses. If a stock drops 50% then another 50%, the amount lost on the second drop is only half of what you have lost on the first drop ( the law of diminishing losses ). Obviously it is still a loss, with your stock losing 75% of its value , but somehow the calculation makes me feel less sick. Expect the worst and rejoice when it isn't as bad, it's still bad but not as much.

AbleNorn 10 Oct 2008, 9:17am

Suggested google searches include lazy portfolio, coffeehouse portfolio, couchpotato portfolio. I am not making these up. A lot of do-it-yourself investors in America have adopted these approaches so they can get on with their lives, spend just a couple of hours a year on investing, and still get bank-saving-accounts beating returns *consistently*, but not necessarily double-digit returns.

unfortunately many in UK seem to have not heard of it (judging from my conversations with work colleagues). Indeed the Motley Fool UK site also does not focus share investing so much as bank savings accounts etc on their webpage unlike the US site. Perhaps it is a cultural thing, I dont know.

Doesn't the HYP (High Yield Portfolio) fit exactly this description? Yes, TMF dropped Stephen Bland (TMF Pyad) as a staff writer, but the archives are still there (http://www.fool.co.uk/Investing/guides/The-High-Yield-Portfolio.aspx or click on the High Yield Portfolio link on the TMF Investments home page), and there are two very active HYP discussion boards (http://boards.fool.co.uk/messages.asp?mid=11243059&bid=51676 and http://boards.fool.co.uk/messages.asp?mid=11253077&bid=51166).

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