It's interesting, isn't it, how unpredictable, full of hope, and full of daily drama our stock market is? But it's even more interesting to look at individual investors. We've become the product of a media-driven culture that needs reasons, predictability, blame, scapegoats, and even that four-letter word, certainty. We are a culture of investors where hindsight is quickly replacing the reality-based foresight that used to flow through our veins... just like downhill racing, grouse hunting, and Super Bowls.
The Stock Market is a dynamic place where investors can consistently make good returns on their money if they follow the basic rules of the business and don't check their progress too often with useless tools. The classic investment strategy is so simple and obvious that most investors just ignore it and keep looking for the holy grail(s) of investing: a stock market that only goes up and a bond market that can pay higher interest rates at stable or rising prices. It just won't happen...
This is a myth, not a way to make money. Investors who understand what's really going on in these great markets will see the opportunities and take advantage of them. They won't be fooled by the hype in the media or the performance-enhancing barkers at sideshows. Simply put, when the prices of investment-grade securities go up (like they are now, with the DJIA finally putting together a successful attack on the 11,000 barrier), take your profits. That's the point of investing in the stock market. On the other hand (and there has always been an opposite side, which most people fear as a "correction"), add investment grade securities to your portfolio. Yes, even ones you may have just sold during the rally a few days or weeks ago. This is a long-term (a year or two is not long-term) strategy that works cycle after cycle after cycle. Sounds a lot like "Buy Low, Sell High," doesn't it? Wall Street can't tell you it's that easy, that's for sure!
[Note that Dow Jones 11,000 hasn't been broken since the beginning of this century, and that the last All-Time High in this widely watched average was at the end of 1999. When the DJIA banner is moved back to its historical peak of about 11,700, it will mean that this, the most respected Market Indicator, hasn't grown at all for at least six years. Would the media take this Stock Market Icon's gold medal away if they knew that in the same years: (1) On a daily basis, the price of a lot more stocks has been going up than going down. In fact, in the last 68 months, more than two-thirds have been good. (2) Since April 2000, there have been 120 more days with good news on the NYSE than days with bad news. (3) There were 250 percent more new high prices for NYSE stocks than new low prices. (4) We're working on our sixth year in a row of good issue coverage!
So, know that the values on your portfolio statement will go up and down over time. Instead of being happy or sad about this, you should take steps to improve your "working capital" and your portfolio's ability to help you reach your long-term goals and objectives. By following a few simple, easy-to-remember rules, you can make sure that your investment portfolio always has higher highs and (much more importantly) higher lows. If left to its own devices, like the DJIA, an unmanaged portfolio is likely to spend a lot of time moving in a way that isn't helpful. You can't afford to travel for six years at a break-even pace, and it's foolish, even irresponsible, to think that an unmanaged or passively directed approach will meet your personal financial needs.
What I call "The Investor's Creed" is a nice way to sum up five simple ideas about Asset Allocation, Investment Strategy, and Psychology:
If you're doing a good job of managing your portfolio, you've been taking profits on the securities you bought when prices were falling a few months ago. As a result, your cash position has been going up. And (this is a big and), you could have a lot of cash before the market announces that it's going up. Yes, if you invest properly, you will be swimming in cash around the time Wall Street finds out about the rally and starts telling people to put more of their money into stocks, the number of IPOs starts to rise exponentially, morning drive radio DJs start to laugh about their stock market successes, and all of your friends start talking about their new investment guru or the 30 percent gains in their g-bonds. What are you doing with money?
This is what I call "smart" cash because it's made up of profits, interest, and dividends that have already been earned and are just taking a break on the bench. As the gains add up at money market rates, the disciplined coach looks for sure signs of investor greed in the market: fixed income prices fall as speculators abandon their long-term goals and reach for the new investment stars that are sure to drive equity prices ever higher; boring investment grade equities also fall in price because it is now clear [for the scadieighth time] that the market will never fall again... especially the NASDAQ, which could double in value in the next year. And the beat keeps going, over and over, from one generation to the next. Do you think coaches today will be smarter than coaches in the late 1990s? Have they learned that what makes a rising market strong is also its biggest weakness?
