It Wasn’t Raining When Noah Built the Ark!

SONY DSCThe Dow is back to an all-time high following the financial crisis.  The Wall Street Journal reported on the front page on March 6, 2013 that it took only 17 months to plunge from its 2007 high to its March 2009 low.  But it took four years to recover and reach new highs.

“It’s like deja- vu, all over again”, as Yogi Berra was fond of saying.   Early in the last decade the market reached comparable highs in the spring of 2000 followed by the “Tech Wreck” and a loss of 50% of the value on the S&P 500 by the end of 2002.  It took five years from that bottom to reach the 2007 highs.

The road to the top has been anything but smooth.  The last four years have been volatile and full of uncertainty. From the financial collapse, high unemployment, the housing crash, the European debt crisis and the downgrading of our credit rating with S&P, there have been numerous pressures on the stock market.  Even years which ended up strong had double-digit declines in the market along the way.

The Federal Reserve’s policy of printing money has kept the market moving up even in the face of uncertainty around the globe.  Now investors who previously were afraid of losses are now afraid of missing……missing out on the gains of a roaring stock market. Human emotions often cause investors to buy in at the wrong time and sell at the wrong time.

It is exciting to be back at the top of the market, but investors should acknowledge that risk is higher now than when the market was significantly lower.   What is your risk management plan?  Without a plan do you want to wait five years to recover if we experience another major market decline?

Baby boomers are seriously behind on their retirement plans due in large part to these two major stock market declines in the last thirteen years.  The two declines have left stock market gains essentially at zero for more than a decade.  No one wants to lose 30% to 50% of their retirement nest egg in another market collapse.  And boomers approaching retirement say they just don’t have time to lose again and wait for another recovery.

So how do you manage risk in your portfolio?  Diversification and the pie chart failed miserably in 2008-2009.  The steeper the market declines, the more correlated various asset classes become.  The pie chart is not risk management.

Knowing when to sell is just as important as knowing when to buy.  You have to be right on both sides of the trade.  First know what risks are inherent in your own portfolio and how much risk you are exposed to.  Then establish a solid plan to manage that risk before the market cycles into the next downturn.

This report is a publication of Guelich Capital Management LLC, a registered investment advisor.  Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.  All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.