Oh to be a Slumdog Millionaire. It's been an unlucky 13 years for stock market investors, and worse may be to come. Is it time to sell up and end the pain?
I detect more than a little panic surrounding the stock market. In the US, the Dow Jones Industrial Average hovers just above 7,000.
7,000?
It sounds so low. To be completely honest, it snuck up on me. The next step down will see the Dow in the 6,000s. Where to after that? Not the 5,000s? Surely not? Please?
That Shrinking Effect
The Dow already sits at a 12-year low. It is down over 50% from its peak in October 2007. This year, already, it is off 19%. So much for the January effect. Or the February effect. The only effect this stock market swoon is having on my portfolio is a shrinking effect.
Here in the UK, things are hardly any better. In fact, they are arguably worse. The peak for the FTSE 100 came not in 2007, but way back on the last day of the last century, at just below 7,000. You could argue we've been in a long bear market ever since then, with the market down 45% over the past 9 and a bit years.
It’s enough to make grown men and women cry. The FTSE 100 first hit the heady heights of 3,800 way back in April 1996, almost 13 years ago. Excluding dividends, if you'd left your money under the bed for 13 years, you'd have the same amount today as if you'd collectively invested it into the country’s leading 100 companies.
A Big Fat 0%
It's damning evidence against investing your money in the share market. Not only does it involve risk, including the very real possibility of losing money, but over the past 13 years, capital appreciation has been a great big fat 0%.
And it could get worse, as the bottom of this market may still be ahead. For some time now, many pundits have been predicting an economic recovery in the second half of this year.
As I’ve pointed out a few times before, this just isn't going to happen. The penny is starting to drop that we are looking at a deep, long recession. Collectively, we've been on a massive debt-fuelled spending binge, funded by generous banks like Royal Bank Of Scotland (LSE: RBS), Lloyds Banking Group (LSE: LLOY), HSBC (LSE: HSBA), Northern Rock and Bradford & Bingley.
As consumers are finding out, de-leveraging, or paying back their debts, takes a lot longer than it took to spend the "free" money. It's even harder to pay back and takes even longer if your bonus payments have disappeared, if you've had to take a pay cut, or worst of all, you don't have a job. And you can completely forget a new outfit from Marks & Spencer (LSE: MKS), a new pair of shoes from Debenhams (LSE: DEB) or a new flat screen TV from DSG International (LSE: DSGI).
Bankrupt Banks, Rich Criminals
Most of the nation's banks are effectively bankrupt. Without government assistance, they'd be insolvent, and almost certainly die a quick death. Thankfully, that situation will never be allowed to happen.
Savers must be protected, or else the entire global banking system would simply collapse. Millions of people across the globe, me included, would withdraw all their money and stick it under our beds. It would be boom time for petty criminals, but disastrous for the global economy…as if we need any more disasters!
To Sell Or Not To Sell
Given the gloomy economic prognosis, and the economy is not suddenly going to recover in 2009, and the bottom of the market may still be ahead, you'd be forgiven for either selling all your shares now and/or steering clear of the stock market until the dust settles.
If you really and truly do feel scared and stressed about incurring future stock market losses, you are better off just selling up. Your health is your greatest wealth, and it's not worth risking it, whatever the cost. I've often found "ending the pain" by selling a slumping company very therapeutic. No more do you have to look at the losses continuing to mount. You've said goodbye, taken the hit, learnt the lesson, and now you can move on.
As for me, I'm not scared. Scarred, yes. Scared, no. The daily losses, coming on top of the 31% plunge in the FTSE 100 index last year, are very wearing.
The Economic Recovery Will Come
But every time I look at the individual companies that make up my portfolio, I only see cheap shares, large companies like GlaxoSmithKline (LSE: GSK) and BHP Billiton (LSE: BLT), to name just two. Every time I think about selling, I think about the economic recovery. It may take 12 months, 2 years, 5 years or maybe even 10 years. But surely it will come.
We are in a deep hole, yet there is hope. Today, unlike October last year, we at least know the extent of our problems, and their ramifications. Solutions have already been attempted. Some are working, many are not…or not yet anyway. More solutions will be required, by government, by businesses and by consumers.
Some solutions will work. Slowly but surely our economy will show signs of life. Momentum will come again, and this time the momentum will be upwards, not the downwards momentum we've been experiencing for the past 12 months.
The Market Moves Higher In Advance Of Economic Recovery
Most experienced investors know the stock market moves ahead of the economy. If you think the economy is going to improve in 2010, you want to start positioning your portfolio to take advantage of that economic upswing 6 to 9 months before it happens.
We may not be too far away from that point today, strange as it may seem. I'm not suggesting you go hell for leather and invest all your spare cash into this downward spiralling market right now. I am continuing to suggest you consider drip feeding money into a low cost index tracker, and/or selectively buying high quality, cash-rich businesses over the course of 2009 – exactly the types of companies Maynard Paton is continuing to recommend to members of his exclusive Motley Fool’s Champion Shares stock picking service.
I'd love to see the market go higher from now, and look forward with excitement to the next bull market. I think the wait, and the pain we're experiencing now, will be worth it. But if you want to sell now and "end the pain", I understand your decision.
More on the economy, investing and the markets:
> Give The Motley Fool's Champion Shares premium share tipping service a try for free. Sign up to a free 30-day trial and you can instantly find out the names of all the cash rich companies Maynard Patron is recommending as buys today. Click here to take a peek – there is absolutely no obligation to subscribe.
> Of the companies mentioned in this article, Bruce Jackson has a beneficial interest in Lloyds Banking Group, GlaxoSmithKline and BHP Billiton.
