When Will the Bottom Drop Out?
by Rich Topps, Sr.
Basically, no one knows the answer to the question when. You may see, hear, or read predictions in the financial media that sound quite convincing, and may even be based on past events, but virtually all market cycles are different and sooner or later the stock market will drop out. Given the length of the current cycle, we are surely nearer to a "Drop Out" than a couple years ago.
Where We’ve Been
Since the Great Recession of 2007-09, interest rates have plummeted. The stock market has soared and holders of stocks and bonds (should) have seen the value of their portfolios appreciate quite nicely. Along the way, prudent investors take reasonable profits that become available and reinvest the proceeds in assets that either reduce risk and/or are undervalued relative to other alternatives.
Watch Your Step
Such an approach is key to successful investing. It is not easy to maintain, and it requires a substantial amount of discipline. As recently reported in "The Wall Street Journal", however, human nature often runs in the wrong direction. Professor Terrance Odean, who studies investor behavior at Berkeley’s Haas School of Business, states that people buy and sell stocks at the wrong times. One of his studies concluded that, “They did worse than if they had been throwing darts.” Do we have reason for concern today? Investor confidence is high yet volatility shows that people are quicker than ever to try and “time” the market.
A competent financial advisor earns his or her keep by maintaining a prudent investment discipline in good markets and bad, and by not getting swept up with perceived unending market momentum. Such an approach generally will not produce the very highest returns in good markets; however, and perhaps more importantly, it will likely limit or mitigate the worst returns in bad markets.