Five Painful Stock Market Lessons

Although at last, you are beginning to agree with what I've been writing for the past month or so, you still don't seem to grasp the basic problem: DEBT!

The country is as good as bankrupt. Can't you see that?

All this borrowing the government is attempting (which will fail), at some stage will have to be paid back.

This is all about saving Brown's political skin - nothing else. Forget the political bullshit, that's the bottom line.

Nothing is for nothing in this world!

We still haven't seen the likely legislative repercussions of this yet. It will happen and how that is going to affect future returns remains a mystery at this point in time.

I just hope fellow Fools are not taking you at your word and investing in the market right now. It has further to fall. I'll stick my neck out (make the most of it) and say I think the FTSE100 is going down to around 3670. If it breaks that, then goodness knows where we're going to end up.

Regarding BlueBay

http://www.fool.co.uk/news/investing/investing-strategy/2008/11/21/profiting-from-the-upturn.aspx

Leaky sieves.

If BlueBay has a few major clients, then any one of them might switch its business elsewhere. think FCAM. Has there been a rumour of this ?

I ain't sayin' nothin', sure fools those bobo flies though.

"FREE TRADE" is the problem. Trouble is it's "FREE" for the Chinese when they sell to us, but when we export to them there's a 30% tariff. And they fix their currency at an artificially low level (not free trade). And they don't have all the red tape imposed on the UK by Old Labour.
So we have a big trade deficit, which means we get in debt & need to borrow money from overseas.
Oddly enough, it gets to the point where they don't see us as a good risk for loans.
It's time we started looking after our own economy, not other peoples.

It was excessive spending by the Government that got us into this mess and now we're going to spend our way out of it? How does that work?

I know that the credit crunch started in America, but the profligacy which GB displayed after forgetting prudence has put us in a much worse position than most other countries, as demonstrated by the decline in the pound.

I'm working abroad at the moment and have had a theoretical 20% increase in pay as I'm paid in a currency other than GBP.

It actually doesn't improve things (unless I take the risk of repatriating my money in return for low interest rates) as I have to pay local prices, and there's 10% inflation here.

The reason I'm working abroad - GB has destroyed most of my pension (yeah, I'm one of those who got caught in the Equitable Life debacle) so I'm trying to make as much as I can in a short period so that I'm not totally destitute when I finally make it back and become too decrepit for paid employment.

And finally, there's a story that during WWII the Americans took a dislike to UK people writing U/S on material (it's still used and stands for Useless) so they started writing G/B instead (for Gone Bad).

I have no idea of the relevence of this story but use it to express my total confusion at what is going on - How has GBs' standing improved over the last few weeks? Don't people realise that it's all going to be paid for sometime? (pace, Last Chip, I know you made this very point).

Hi all,I'm no financial whizz-kid,but isn't it correct to say that about two years ago the US economy was heading "South", so they lowered interest rates so that people would spend their way back into solvency?This strategy caused a big bubble which burst,and the US AND UK are doing the same thing over again.
I think the only stable economy is one which manufactures goods,not imports cheaply for no other reason than to feather the middleman's pocket.
We must have a manufacturing base.
People seem to forget too,that low interest rates are only good for borrowers "gulp".
Higher interest rates would be good for savers who very often use the proceeds to spend,whilst reigning in excessive borrowing.
The problems were caused by lenders ,ridiculous use of credit cards,and panic borrowing to get on a steeply rising housing market by borrowers.
If more sterner regulation of borrowing had been applied,then some of this may not have happened.
People would not have bought so much,the greedy companies executives would not have had such a field day,and prices would have been more stable.
Also,people expect too much too soon.They will not save,especially if Mr Jones next door buys a new car etc,whether he can afford it or not.
The monitoring of an economy requires a firm grip.
Can the public and governments stand up to it ?

Thanks, IraqiMac, beat me to it

Wow - The Fool has become so depressing.
I've lost a lot on my portfolio, but shares can go down as well as up...we all know that, you just stick with the lows and wait for the highs.
Things will get getter & air is still free.

I agree with gold being the best investment over the next couple of years. I have visited the bullionvault site several times and even opened an account and got my 1 gram of gold free! I was a bit concerned that they are not regulated by the ISA. They appear to be a PLC. Does this not mean that if they go belly up then you lose your money like any other company going belly up? I've had experience of this in the past as a share holder and it is not nice.
Also the bottom of the market would be 0 (ZERO) I believe.

FYI - I set up a fantasy portfolio with the 7 cheap shares highlighted by Bruce last week. I put about £1000 in each and it is currently 12% down on the week. YES I NEED TO GET OUT MORE!!

current value £6,480.67
current loss £901.73 12.21%

Mike you're right. To do nothing now would be a huge, huge, mistake.Have people not heard of the Great Depression it was very popular in the 1930s.
I got murdered by the Tory Policies of the early 1990s when Norman Lamont (who I still think was the worse Chancellor ever- a hard label to get given some of the twats who have held that job over the last 40 years) sat on his arse and twiddled his thumbs while the country's economy collapsed.

And by the way - just read your comments Mike. I'm so sorry you feel that way - because I guess you know some secret way to finacially protect yourself and your family in some better way? (by sticking your cash in the Post Office maybe - almost as good as under your bed). If you think Gordon Brown is the new 'Global' fiscal messiah - then you are going to be even more disappointed with life as you get older - certainly if you are dependent on the State! It's a very big mistake to let your political views cloud your financial decisions. Gordon Brown and his so-called 'socialist' friends won't. But then they will probably have a slightly different pension entilment to you though - won't they??

Oh dear Mike - you do seem to have a chippy attitude? Surely Maggie T. had a passion to get control of the country out of the hands of people like Arthur Scargill who had a big attitude problem, and let Mr Market Place bring financial wellbeing to more people than a Socialist system ever can - (Remember the collapse of the Soviet Union?) Margaret's failing was that she was not the best judge of character - i.e. Lord Archer. But she saw clearly that the free market was the way to increase most peoples standard of living. The free market, with all it's imperfections, is driven by the natural wish of able people, who have a work ethos, to better themselves. An adequate safety net is essential for those who genuinely cannot work.
But a free market only works where there is real competition. Real competition gives the consumer the best possible goods or services. Unfortunately, we do not have real competition in several important areas. The doctors' and dentists' "unions" do not allow advertising, which would bring in competition and therefore lower fees - have you ever seen an advert offering fillings and crowns at a reduced price? Is £200 an hour a reasonable charge for people in need, because that is the going rate due to lack of healthy competition. The same applies to private doctors and surgeons. The Law Society exists to protect it's members' interests - unfortunately NOT those of the public. When licensed conveyancers and Will writers were allowed to enter the market, fees dropped drastically. Until recently there was not real competition amongst supermarkets but maybe Aldi and Lidl will bring that about, now that people have to take more care of their spending.
To wondermash - the gold in BullionVault is yours in the most unlikely event of the company going belly up. The only risk - perhaps unimaginable - is that when you fund your BullionVault account or sell gold, the money goes into an account at Lloyds bank. B.V. are currently looking to find an even safer place to hold clients' funds.
And to redvoice - I know what you mean about inflation and deflation - but all those I respect in the gold world agree that paper money is beig devalued so fast because of governments' printing more and more that this alone will cause gold to be seen as a haven of real value.

John Cleese said it all:

You are born

Lifes a Bitch

Then you Die


in the meantime I suggest you
buy a banjo and give up the rest

Colin 106

Re Gold.

Over the medium to longer term gold is set to rise.

What I was thinking about is over the next year when it looks like we're heading for an inflation rate at absolute best of 1%-2%. We could actually go to deflation. How would gold rise in those circumstances?

Heavens, Bruce! Never mind the poor state of the economy, are you going for broke in the atrocious prose contest??
Did you really write the following passage and not blush with shame?
"The chickens have come home to roost. The tide has gone out, and there are literally millions of people exposed as swimming naked. The reverberations are clear to see, and they’ve got further to go. We’re not out of the woods yet"
What a cliché-ridden morass of jumbled imagery and mixed metaphor!
Keep up the good work, one thing we definitely need in these straightened times is entertainment.

Thank you, Banjo, for providing us with a ray of light in the gathering gloom. But are you suggesting we buy a banjo to laze away the days of unemployment, or so that we can banjo everyone else, including the markets?!

Thanks to Fool for this excellent article.

This is probably why you need fixed-income (bonds) in your portfolio. If you have 100% fixed income, you get 0 risk and if you have 100% equities, you get a Lot of risk. If you have 50% fixed-income and 50% equities, the whole ends up greater than the sum of the parts and you get slightly higher returns than you would think but with much lses risk. This is explained beautifully in http://www.fundadvice.com/fehtml/bhstrategies/0309/0309a.html - Have a look at the table there.

This article : "Finetuning your asset allocation" also explains it very well : http://www.fundadvice.com/articles/buy-hold/fine-tuning-your-asset-allocation.html

As illustrated here : http://www.marketwatch.com/LazyPortfolio/, a portfolio as above with 60% equities (with the equities spread out among domestic and international and large/small/growth/value asset classes) and 40% bonds dropped "only" 27% this year while the broad market crashed 40%.

I realize the Fool does an amazing job of finding stocks of great value companies to buy, however, for most people, a well assembled portfolio of index funds covering various asset classes and bonds thrown in for good measure will almost give the historical stock market returns (9 to 10 % pa compounded) but with much less risk and volatility (standard deviation).

I know it is fashionable to criticize America in these parts of the world, but in America, an entire grassroots movement has evolved even Since Jack Bogle founded low cost index funds Vanguard. Above lazy ports can be built using low cost Vanguard funds. These are discussed extensively on Bogleheads.org and www.early-retirement.org. I saw a coverage on similar portfolios for UK at : http://www.investorschronicle.co.uk/Tips/default/MiniTips/article/20080418/5d09343a-0d30-11dd-9279-0015171400aa/Lazy-portfolios-UKstyle.jsp

The advantage with setting up a lazy port is you dont have to worry about timing the market, choose a portfolio and stick with it, and keep adding to it when you can. (dollar cost average). As your retirement time approaches, ease more into bonds. For instance, in the asset allocation aticle above, people with only 30% equities, 70% bonds got an annualized return of 9% with very little risk, and a worst 12-month return of -10%.

I know some people will respond to this article saying stock market is all evil. But asset allocation is the key, instead of the usual populist rhetoric of "stock market is evil, rich getting richer, poor getting poorer" blah blah blah.

I would like more coverage on asset allocation and lazy portfolios from Motley Fool.

ajooba

Spot on!

You seem to know a lot about asset allocation. Perhaps you should teach some of the Fool writers how to do it.

After 24 years of investing, I've learned that an investment portfolio needs to be a trade off between risk and reward.

I'm still 28% up on my total investment portfolio that I started in 2001 and am currently almost 50% in cash or fixed rate bonds.

I would like it to be less but for this to happen three thing have got to occur:
1) Stockmarket volatility has got to go
2) Trading volumes have got to return. Thin trading only adds to the volatility and shows no appetite for risks
3) Let's see a flicker of good news on the real economy, you know, companies that make and build things to sell (not Labour government bailouts, they're just a finger in a dam full of holes!).

It's time not timing that matters. No need to chase the market down we can all get on board the train on the way back.

Great article as always.
I don't want to be unduly optimistic (I've been there before and been caught out) and yes I know you can't ever call a bottom but hasn't 99% of the bad news been priced in.

The FTSE now stands at 3776 which is not far off the 3670 mark mentioned above.

There's probably going to be a Xmas rally followed by another collapse in Jan/Feb followed by a rally in April/May and another collapse in the Summer followed by a bit more of a sustained upturn from October onwards. (historically bear markets have a 2 year life, or so I'm told) However the recovery is probably going to be mild and slow.

In bear markets surely you've got to take any profits during the rallies. Didn't Buffet also say investors should go in when others are rushing out.
I'm a complete novice so does any of this seem accurate or am I talking out of my a***.

redvoice, I note you say you're a novice.

Please do not take my figure of 3670 as being gospel. It is simply a level which I've estimated (at present) as likely to be the bottom, but given the financial world we're in at the moment, could change at any time.

Even if it does prove to be the low point, I think it extremely unlikely, you will see any significant gains in the near future and possibly a lot longer than that. So please tread carefully. I would not want it on my conscience that you lost money, which in my view is still a very real possibility.

Don't be surprised to see some big names go bankrupt, particularly in retail. Anything to do with the motor industry, is seriously bad news. And they're only the tip of the iceberg. In short, if you're not comfortable with, or can't afford to lose whatever you intend to invest, stay well clear.

Bill19501

U/S in miltary terms which I would imagine you are referring to actually stands for UnServiceable and not Useless.

Everything that LastChip says is true, especially about Brown. His ability to turn the truth on it's head has recently been magnified many times over because he now has arch plotter and spin master Mandelson advising him.
I am certain that the markets have a lot further to fall.
As assets and paper money lose their value there is only one investment which will compensate as it always has - gold.
Forget shares for now, and also deposit accounts, whose interest rates will fall, and whose value will be steadily eroded if inflation does it's work.
Buy gold bullion - gold mining shares are for the experts and too volatile - and ideally buy on the dips and sell into strength, or buy and just wait for the coming financial tsunami to lift gold from it's present price of around $800/oz to double that.
I have used BullionVault.com for over two years (their Zurich vauly) and cannot praise them enough for their honesty, integrity, tight dealing spreads, excellent dealing platform, helpful staff, security and tiny dealing costs. (I have no connection with them except as a client) The gold is in your name, in contrast to when you buy gold from a bank, when, unless you give specific directions to the contrary, your gold will be "unallocated" which means that in the event of your bank's failure, "your" gold becomes part of the bank's assets. Unbelievable I know - but true.
Financial advisers - at least those who work for "free" - will never recommend bullion simply because there is no commission for them. (If you really want your financial adviser to be truly impartial, pay him a fee - say 1% of the value of your investments - and get him to rebate to you his 3-6% commissions from the investments he recommends)

A good thing none of the above ranters have ever studied economics or got beyond thinking that a nation's finance is like a household one. We were saved from barbarism and a return to the Middle Ages by the New Deal in the 1930s. Bush's administration borrowed far less and spent far less than the European economies and is now in far worse a state, indeed is the main reasomn there are problems in Europe. Reaganomics and Thatcherism are dead which is why that poor lightweight Cameron is scratching around to find something resembling a policy while the most successful chancellor in living memory is steering not just ours but the whole of the west's economies through the mess the yanks have led us into. If you've lost a few quid on the stoickmarket forgetr it; it's the middle class equivalent of going to the bookies.

Re: Gold.

Gold is surely a hedge against inflation. Given that we could well be heading for deflation (as miserable as hyper inflation) and that interest rates will be heading for 0-1% everywhere over the next year is Gold really a good investment?
Gold has only really been a stellar performer during the stagflation of the '70s and I don't think we're going there. Granted when inflation kicks back in again(2010-2011)with the reflationary comeback proposed by Brown and Obama then I can see it. But gold now,really?
I have a gold etf and I'm profit taking this week if I can.

Hi Ajooba - interesting comments. Anyone who has not read Grahams "Intelligent Investor" should do so. I did so some time ago - and I took his advice especially about portfolio mix (He lectured Warren Buffet at college - and it didn't hurt Warren too much). As such last year I was 50:50 Equity:Bonds but now I'm 20:80 and pretty relaxed about life. Graham wrote this book in about 1938 I think - not much has changed about common sense investing since then in my view. Fashions come and fashions go - but get the basics right and you will be just fine.

Timing the bottom of the market may be impossible, but I can tell you one man who got his timing exactly right. Tony Blair.
I imagine he is sitting in some all expenses paid 5 star hotel, having a good laugh at poor old Gordon’s attempts to sort out the mess he inherited (even if they were both to blame). I wonder if he managed to offload those flats in Bristol.
I suspect that David too is thanking his lucky stars that he didn’t win the last election, I know I would. 2010 will be just the right time to come back and take the credit for the recovery that will come despite the meddling of politicians.

To those who say "now is not the time to get into stocks, we are yet to see the bottom, what stocks will do over the next year or so, now is the time to get into your favourite pecious metal" etc, my hats off to you. So far I dont know of anyone who makes successful short term predictions *consistently*. But if you know how to time the market, more power to you. Lets not forget tho' that if we wait for the robins, spring will be over.

We have every right to challenge the Fool but I think some of us are misreading the Fool. I dont think the Fool is saying that now is the time to get into equities and you can make 10 times your investment in 3 nanoseconds. Far from it. The message I am getting from Fool is that you never know when / how to time this, but at these relatively rock bottom prices you'll be kicking yourself 20 years - 25 years from now. Can it drop a further 50% 1 month down the road ? Sure. Can it go up, down, sideways, orthogonal, 4D, etc in 1 month ? You bet. Nobody knows. For sure. Whats the point of even trying to make such predictions ? Is there a science to it ? Macroeconomics is extremely difficult. As John Kenneth Galbraith said : The function of economic forecasting is to make astrology look respectable :) Just a while back we thought we were going to have inflation. Its deflation now.

I find the Motley Fool an ethical oasis in the world of short term predictors, CNBC style minute-by-minute worriers, Jim Cramer kind of rabble rousers. I like the long term perspective the Fool provides. A long time back I used to think stocks were All about gambling. 11 years ago I stumbled upon the Motley Fool when I lived in the U.S, and immediately the simple mantras started to make sense. To get some level of growth for your money, you need to be in equities for the long run. Why ? Innovation occurs, companies grow, thrive, prosper. In spite of some small and large hiccups along the way, economies survive just fine. Unless you made all your investments at the very top of the bubble, you should be fine over a reasonably long period. According to Jeremy Siegel, 97% of the returns of the stock market over 100 year periods are due to dividends. I am sorry but gold does not pay dividends. http://www.fool.com/teens/FamilyCollection980325stocks2.htm

Environmentalists would object and say growth cannot continue forever without everlasting damage to the environment. well, not necessarily. A lot of the recent venture capital investment in Silicon Valley has gone to fuel cell companies and other green technology companies. With oil being pricey it was only a question of time before some smart Silicon Valley entrepreneur came up with economically viable alternatives.

I dont think I need to point out, in a Motley Fool forum of all places, that stocks outperform all other classes of investments over long periods of time. Small caps outperform Large caps. And value outperforms growth stocks. This was the famous Eugene Fama and French's work at the Graduate School of Business in Chicago. So if you have a porfolio of LargeCap X SmallCap X Growth X Value and do the same for international and emerging, and also have some bonds, some of these asset classes become uncorrelated which helps to reduce the risks and boost returns. The trick is to find low cost funds which track all these asset classes. This is possible in USA with the very low cost Vanguard funds. I need to find similar in UK. I could go with Dimensional Funds which is (above) Eugene Fama's brainchild. The idea is to have low cost index funds that track every single slice and dice asset class as above. But Dimensional is available only thru fee-only advisors.

Thanks Smiley61 and Trackaman. Yes I guess I am okay in theory but havent quite managed to put together a personal portfolio to weather the storm. Fortunately procrastination helped me in my UK pension which was sitting in cash for ages. With the market crash, I am easing that cash into equities every month. In my US pension, I failed to follow Benjamim Graham's advice of having no more than 75% in equities. It was 100% in stocks, and I am slaughtered now. But 20 or 25 years from now when I will need it, I will hopefully come out fine. I have been reading up quite a bit on asset allocation but mostly from US based websites : fundadvice, altruistfa, bogleheads.org, early-retirement.org, investingessentials.blogspot.com etc, all outstanding sites in my opinion. Still looking for similar UK websites. But there have been some good UK related threads on lazy portfolios on bogleheads.org. http://www.ifa-uk.com/ should be up soon so hopefully we will get more info. But as I said, I wish Fool would cover this topic extensively.

In contrast to Ajooba, above, I'm keeping my hat firmly on to those who say:
"... now is the time to get into your favourite precious metal".

The precious metal market is going to be turned on its head once control over the riches in the Congo has been established. Notice the more polished/considered build-up of the humanitarian arguement in the media at present. It is only a matter of time before the vast mineral & oil wealth is made available...

The stock markets are bound to recover in time in my view. No one really knows when and no doubt some companies will not survive but my guess is that in 5 years time we'll look back and see this as a great buying opportunity just like March 2003.

Perhaps it's time that financial companies started warning that "Shares may go up as well as down"