Sunday, May 06, 2012

Will the stock market adjust?

This weekend, Donald Luskin had an interesting and compelling piece in the Wall Street Journal that forecasted the impending doom to stock and bond prices were we to see the adjustments that are slated for the end of the year. I encourage you to read Donald Luskin's piece to see if you agree with him. Then come back here....its ok. I will wait.

For me, what is most interesting about this piece is not the doom-and-gloom scenario that Luskin is talking about. Instead, it is about what to do next? I recently found myself wondering what the correct next course of action would be in light of such a decline and how I might reduce risk to be better positioned.

I am fortunate enough to be in the high end as far as US Household Income is concerned and measured. And of course, these numbers change all of the time and there is very little certainty about things. So, the question becomes, if you are lucky enough to be well positioned, you have more to lose if you're sandwiched. Of course, people with millions of dollars have even more to lose, but they are also less worried about short term volatility because usually they have paid off homes, cars, etc and while they would be smart to downsize in the wake of a major adjustment, many don't have to do this or worry about it.

My question isn't whether or not the stock market and bond market will adjust....the question is what is the correct thing to do in that scenario. Can I change my behavior to improve the outcome ? And, more importantly, can I time the market correctly in order to take advantage of this? For me, the answer is a resounding no. I am unable to trade frequently and there are too many variables for me to be able to maximize this. Perhaps you are different, and maybe you will be lucky. I think it is just as likely that you'll end up taking a bath though.

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