Despite his wishes, the President will not stimulate the economy by giving us a tax "prebate" (term patent pending). In essence, he's fronting us a refund on our 2008 taxes hoping we'll spend it and spur the economy. Being the frugal miser I am, I plan to put it into some sort of investment (probably a CD at this point) to generate a return on the money. Most people will pay bills they already owe, and so nothing in terms of new spending will result.
The economy will, as a result of this disappointing return, recede. I don't know how far or for how long, but the market seethes with a reactionary few who respond to every wind of rhetoric. That phenomenon accounts at least in part for rising oil and gas prices. Those prices are ironically earmarks of recession, occassioned primarily by the decline in value of the dollar, or INFLATION. Just four weeks ago (I watch this regularly), the dollar hovered near 0.69 Euros, hitting a new low today at 0.63 Euros, or a loss of 10%. In the same time, oil jumped from $100 to $110 and gold from $900 to $1000. Please note that these commodities rose proportionate to the dollar's fall.
Gold and oil are poor earmarks of the market because they respond to fearmongering. These commodities are referred to as futures, which means they trade for what people think they WILL cost at some future point. The traders in this market react to every speech, every threat, every disaster, with abject fear, and they buy more futures, further exacerbating the problem.
Some might argue that stock prices represent a future value as well, and rightly so, since a company stock price reflects what investors think $1 invested with the company will be worth in the future. However, most companies have assets besides the products they make, unlike gold and oil companies, and they have some degree of products in production, whereas a gold or oil venture may just know where to go.
Avoiding the fear mongering is tough, but that strategy is best during a bear market. I have preferred, by and large for the last 17 years I've been in the market, to largely ignore what the market does. My investments, with rare exception, are largley diversified to the point where I can absorb short-term oscillations or sector specific crises.
At the tender age of 12, I inherited $2000 on the advent of a very very very distant relative's death. At the behest of my parents and since I didn't know what I'd spend it on, I put it into the now defunct Berger 101 Index Fund. It remained there through the Gulf War and the volatile and horrible Clinton administration until I drew it out as a down payment on my first home in 2003 (which I eventually sold for 100% profit). I withdrew the money just after the 2000-2001 recession at the same value it held just prior to that bear market. During the time I held the fund, it generated an annual 15% ROI.
Thanks to unforseen circumstances, I stayed out of the market until 2007, when I bought into an aggressive fund through USAA. My strategy so far has paid off in that fund. I follow the principle as I always have of dollar-cost averaging.
Take the beginning of this year for example. USCGX is currently trading at 7.87, which is the lowest level in two years. Since 1 January, it has traded as high as 8.43, but my monthly distributions to the fund on the 12th of every month have resulted in the following:
January 8.03
February 8.10
March 8.06
Between the February and March purchases, the value of the fund surged to its highest point this year, but my purchases have all been near the lows of the year. If the market goes up, I win. If it goes down, I lose less than if I’d bought at the peak.
I believe the stock market is much like the ocean. Each wave is followed by a trough, but overall, the sea remains steadily increasing in volume thanks in part to glacial melt in the Antarctic. Sometimes you see tidal waves, and if you’re lucky enough to catch a wave and sell at the crest, kudos. If not, remember that the sea carried wave after wave of ships safely to destinations without too much trouble.
Trying to catch the market requires far too much time and risk than most people can tolerate. With dollar cost averaging, you end up with a series of periodic investments that sometimes catch the market up and sometimes catch the market down. Over the long haul (7-10 years), properly diversified stocks rise in value. You've seen graphs and charts about how much money things are worth over time. When I worked for Wal-Mart, they told us about one of the longest serving associates who at her retirement held almost $1.2 million in stock alone, from a single investment of circa $5000 back in 1972 when WMT first went public.
I started a jogging regimen last fall to build my body up to join the military. I learned firsthand the biochemical effects that impinge one's ability to continue past the breaking point. When you first start running, you initially hit a wall occassioned by the depletion of glucose/glycogen stores in muscle tissue. Since muscles burn sugar exclusively for fuel and since fat cannot be mobilized into sugar for metabolism until your body reaches an aerobic state, the anaerobic conditions necessitate lactic acid fermentation. Lactic acid buildup causes muscles to burn and ache, and you may feel you cannot go on. As you press on past 10 or 15 minutes, you find that "second wind" that allows you to run almost until (at least for me) you decide to quit. The last 25 minutes of my 40 minute run are easier than the first 15, despite my being "tired".
When the market throws you things that seem hard to tolerate, remember that there is more going on than meets the eye. Many people, burdened by the initial fatigue, quit the race before they catch that spurt that allows them to continue going. Success in a market requires endurance and a sticktoitiveness similar to that of jogging or any similar sport that requires a man to go the distance. It may not seem like you're making it closer to your goal, but if you quit, you will not be better off tomorrow than you are today. Any challenge that presents itself offers you a chance to grow through risk and effort. If you opt out, you remain the same, but if you stay in, you're most likely to grow as a result.
I am not worried about the current downtrend. I am more worried about increases in capital gains taxes proposed by the House, which will cost me more than the current recession will. Recessions are temporary; tax hikes are forever.
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