Saturday, February 28, 2009

Have Investors Been Blinded by the Bubble?

Just a little commentary today folks.

I have been asking myself this question a lot lately. One of my biggest fears post fallout of this debt bubble collapse is the potential wipe out of your average Americans nest egg.

Lets be honest, probably 90% of investors don't seriously do any research before they invest their life savings with someone. Most investors just find a financial planner or stock broker and automatically trust that he knows what he is doing.

The problem here is most of them really don't know what they are doing. Buying and holding equities has worked for the last 25 years. This means that the majority of the brokers and planners in the industry that are handling the nations investments have never really seen a financial crisis. Most of them assure you that they have been through tough times like this before: They will tell you they were there for the '87 crash, the early 1990's housing bust, and the tech bubble collapse.

The truth is they never have really seen a REAL financial crisis. The events described above were all minor blips on the radar. All the central bankers had to do was push a few buttons and boom: The good times were back. Brokers have always been trained to buy equities at bargain prices in the late stages of a recession and then ride out the storm. The market would then soar to new highs 6 years later.

As a result, their clients would roar in approval after watching their 401k's double in a very short period of time. More importantly, the strategies that have been implemented over the course of this miraculous 25 year bull market in equities has allowed the financial industry to build extremely strong credibility and trust with their clients.

The concern I have here is there is a very high probability that this formula of buying and holding isn't going to work this time. In fact, it may never work again. The problem is most financial planners and stock brokers continue to stick the same game plan and have done nothing to protect J6P's portfolio's. I can't tell you how many people that I know that have lost 40-50% of their 401k's.

What scares me here is when clients get nervous and ask their advisers what they should do after taking such hits to their portfolio, they all usually get the same answer: NOTHING! They tell them over the long term stocks always come back and blah blah blah.

What amazes me here is even after a 50% drop, J6P continues to believe them! I guess why wouldn't they? Its worked for the last 25 years right? Although I understand why they continue to trust a 25 year investment approach that has always worked , I am still surprised at how apathetic people are after losing half of their life savings. I would be absolutely livid if I hadn't been lucky enough to have gotten out and lost 50% of my life savings.

So I guess the conclusion to the question that I asked in the title of this post is YES America has been blinded by the bubble. This is a very scary conclusion because the ramifications of such thinking could be potentially devastating if stocks continue spiral downward.

I say this because the risks of a total collapse are rapidly increasing in my view. An 80-90% drop in equities cannot be taken off the table at this point folks. The policy response to this debacle has been terrible. Geithner continues to let the banks hide their losses, we are spending trillions of dollars that we don't have, and the thieves that created this fraud are all still in power. This is a recipe for disaster.

Everyone just assumes that the market could never drop like it did during the depression. Well folks, we just saw an eighty percent wipe out 10 years ago as the tech bubble collapsed. Why couldn't we see the same thing again? I mean the recent economic data that has come out suggests that this collapse is actually worse than the one seen during The Great Depression. If this is the case than a 80-90% drop in equities must be considered.

If this devastating drop occurs, and most investors continue to buy and hold, the table is set for potential social chaos.

I say this because the average American has close to zero savings. If their retirement gets wiped out and they have no cash, how in the hell are they going to live? We would need social services to be set up virtually nationwide in a matter of weeks in order to keep the peace. People get desperate when they are starving, and this type of situation never ends well. I guess now I can see why gun sales have soared.

Now this is a worst case scenario here but I am just trying to make a point.

Bottom Line:

History has shown time after time that it repeats itself. The financial industry has reacted to this crisis in a very predictable manner: Buy and hold! If you have accepted this type of advice, I think you need to re-evaluate your situation. Thinking out of the box at this point is a must when it comes to your investments. This isn't your average recession however our financial advisers are treating it as such.

I think everyone needs to change their thinking around how they invest and who you trust. You need to seriously question your broker when he tells you to buy and hold. Don't get caught with your pants down as this crisis intensifies. How many times has your financial advisor told you to keep holding over the course of this collapse? How has that worked out for you if you have listened? Its time to be prepared for the worse case scenario.


Stocks don't always go up. Stocks don't always come back. Stocks can stay flat or decline for decades. Stocks can also collapse to almost nothing. If you are not diversified with a nice chunk of fixed income right now go find another broker because you are very vulnerable if this economy falls apart! The risks of an economic collapse are rising each day.

Its time to change our way of thinking when it comes to investing. Flexibility and diversification will become critical if you want your money to grow from now on over the long term.


Minton Mckarkquey said...

One of the best posts ever, Jeff. I think these are the key questions.... unfortunately I think we're going off that cliff very, very soon.

Jeff said...

Thanks minton!

Yeah it appears that cliff is right around the corner.
Let's hope that more people get prepared for it!

Avl Guy said...

Inertia ia a real b#t@h, Jeff.
Just ask the crew helming the Titannic.
Human inertia is just as hard to steer towards any new paths.

But even Billionnaire Saudi Prince Walid "rode" his stake in city down.. down.. down, rode it down from $55 to a buck-fitty-a-share!

And that horse ride started with $600 million in 1991 dollars.

Saudi Prince Is Humbled by Citigroup
By LANDON THOMAS Jr. and ERIC DASH February 27, 2009

Jeff said...



I guess the prince never heard of buy low sell high.

I just goes to show you how how clueless the ponzi investors are.