Tuesday, March 03, 2009

So What If You Can Call The Bottom?

The funny thing about nearly every decline in a market, whether it is stocks, bonds, or housing is that people are incredibly fixated on calling the bottom. In fact, just this past week, the market came back up over 7000 and there was a bit of hoping going on that the bounce was an indication of the bottom. I get it.

I really do get it. But even if you think that you have a good chance of being right...and even if you are right this time and you think you can get out and back in at the right time, (There are many studies that say statistically that you can't do this reliably....) the more practical question for many people is: so what?

Most people at this point are over leveraged with debt up to their eyeballs. It is a combination of consumer debt, mortgages, credit lines, and loans for education, cars, or even rehab projects on homes. It doesn't matter what kind of debt it is; the average consumer in America cannot afford to be in the business of calling a bottom.

The reason that people are so interested in bottoms is the idea that you can 'get in' at the bottom and make much more money. But in the price of 'getting in' is high when there are actual bills to be paid and the savings account balance is a paltry sum. This is the opportunity cost. When your lottery ticket costs only a dollar but you are holding one hundred, it is quite easy to make a bet. But, where most people are right now is someplace quite different.

Many people actually owe high multiples of what they actually earn in an average year. I think that all of this talk about bottoms and deflation is the proverbial tempest in a teapot for the average American family. Few families have the requisite 'spare thousands' required for this kind of action...and even if they did, how confident do you have to be in order to risk it given how volatile the markets have been of late?

Personally, I continue to invest for retirement with diverse mutual funds, save a little each month, and stick to my budget. It is old school, but I think it makes a lot more sense when compared to worrying about huge macro-level trends that are literally 30-40 years from playing out entirely. Furthermore, by paying off debt, I am dealing with items that are in my control without worrying about the scare-tactics that others like to deal with. They make great TV and radio, though.