A chart that you don't want to miss
January 21, 2009
– Comments (24)
I'm not a big believer in technical analysis or charts, but Barry Ritholtz posted an outstanding chart in his "Big Picture" blog yesterday that anyone who hasn't seen should definitely take a look at. The data series that was used to create the chart spans an incredible 137 years. After the recent carnage in the market it appears as though we are just back at the level that the long-term trend indicates we should be at.
Unfortunately, as you can see from past recessions the markets never just lands softly and falls in line with this level. Markets usually overcorrect, sometimes dramatically, before reverting to their historical trend level. Using history as a guide, it appears as though we may still have a ways to go before we see the bottom in the S&P 500 and other major indices.
The fact that the markets have already fallen by X% doesn't mean that they won't fall further. The high that the S&P 500 hit during the latest bull run was an astounding 152% above the historical trend line. This is more than twice the bubble that was created in 1929. Things clearly got ahead of themselves.
My fear that we haven't seen the bottom of this bear market yet is why I have been limiting my purchases of any new investments to common stock in companies that pay solid dividends with low payout ratios and lately to things even higher up the ladder like preferred stock and bonds. I have been looking for things that pay anywhere from 5% to 10%, but I have made exceptions on both the upside and the down side for certain opportunities that I find attractive.
I am happy to lock in near 10% annual gains in my portfolio and not worry about any sort of capital gains. I plan to keep averaging into the markets for a long time to come. Eventually we will find a bottom. Where it is difficult to say, but I am being conservative in my investments looking for yield, diversifying, and sticking to companies that trade at low multiples, P/E ratios of 15 or less and ideally of 10 or less (I realize that there is more to valuing stocks than the P/E ratio, this is just one of the things that I look at. Cash flow and payout ratios are more important to me in this sort of environment).
I look at investing as a must. I can't count on anyone to take care of me in my family when we get older. The odds that Social Security will be around when I retire are practically zero. Even if it is around, it is entirely possible that there will be massive inflation then that render its payments severely inadequate, as if they weren't already. Saving is necessary to protect myself and my family and if I am going to save, I need to see some sort of return on my investment. Treasuries yielding 1%, 2%, or 3% just don't cut it.
As bad as things feel right now, the market will eventually bottom. Anyone who buys stocks near the bottom will profit handsomely. Absolutely no one knows when this bottom will occur. It is entirely possible that it won't happen for a while. I will continue to invest on a monthly basis for the foreseeable future and I will eventually be rewarded. In the meantime I will be getting paid to wait for things to get better.
Deej
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