Ask Natalie: Trading is Tough These Days

Hi Natalie. Tough tape these days for trading. I am tired of seeing slow declines in many of my long-term positions! Do you think it best to capitulate and sell currently declining positions, which you believe have great growth potential going forward? Signed Impatient With Volatility
 
 
Dear Prudent Investor,
 
First of all, I’m going to assume that we’re talking about a small trading portfolio, not your retirement fund. The strategies for nest egg rebalancing are very different from the strategies used in your trading portfolio (where you take on higher risk for higher gain, with money you can afford to lose). If you are talking about your nest egg, then please let me know, and I’ll do another blog on nest eggs.
 
There was a saying on Wall Street in 1999 that a monkey could throw darts at a wall full of Dot Com stocks and make a killing. Of course, as Warren Buffett is fond of saying, when you get a recession, you see who has been swimming naked. These market aphorisms basically say that it’s easy to make money in bull markets, and you’re very likely to lose a lot of money in bear markets. I have to mention here that the last two recessions were more like depressions in losses. The Dow Jones Industrial Average dove 55% underwater in the Great Recession.

Dow Jones Industrial Average Performance Chart
October 2007 - April 2009

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Chart by Google Finance. (c) Google. Used with permission.

The NASDAQ composite index lost 78% Dot Com Recession, and took 15 years to crawl back to even. Stocks are trading near an all-time high, even with the recent pullback.

NASDAQ Composite Index Performance Chart
March of 2000 - October of 2002

Chart by Google Finance. (c) Google. Used with permission.

The simplest answer to your question is that this is the 10th year of the current bull market. Statistically and historically, the data says we should be near the end. Even great stocks with huge potential can get drug down in a major correction. Even Apple, which had launched a game changing smart phone and was giving it away for free (courtesy of AT&T), lost 45% between the highs of October 2007 and the low of March 9, 2009.
 
Whenever you have an individual stock, there is always a series of questions you can ask that will help you to determine whether or not that stock is really a leader in a hot industry, and whether or not it has the potential to continue to increase in share price. The first thing you do is line up the competition, do a Stock Report Card ®, ask my Four Questions ®, and then apply the 3-Ingredient Recipe for Cooking up Profits ®. As you can see, the analysis of whether or not the company is a great leader in the sector is detailed and full of data. However assimilating all this data takes about 20 minutes, the same amount of time you might spend reading a bunch of articles and receiving a fraction of useable information.
 
After you determine that your company is indeed a leader (the 2nd ingredient in the recipe), then you need to look at the macro economics. What is the general market place going to do? In the 10th year of a bull market you can assume that we’re nearing the end – especially when every economic indicator that was present before the Great Recession is back with a vengeance, with even higher numbers. Real estate prices are higher. Public debt is an astronomical $21 trillion and counting. Consumer debt is an all time high of $13 trillion. College loan debt has gone through the roof to $1.4 trillion. Earlier this year, Alan Greenspan said that stocks and bonds are in a bubble. So it may be fair to assume that the macro environment is inflated and poised for a correction.
 
Before any correction there is usually an effervescence stage. We might still be in that. You just don’t know how long the effervescence lasts before the bubble pops.
 
If for some reason the company you are interested in is trading for a song, or is a game-changer, like the iPhone was, then you might have a window for profit-taking before the next downturn. The 2nd quarter GDP growth report is supposed to be strong, which could lift things at the end of July. However, there are other indicators that might take stocks in the opposite direction, like another increase of the Fed Fund interest rate, which could be as early as June 13th or August 1st.
 
As you can see, there’s a lot of work in trading individual stocks, which is why funds are a better idea for most folks in their retirement plans. If you aren’t sure that your nest egg is protected adequately from the next downturn, then be sure to reach out again. It’s never a matter of market timing, or jumping all in or all out. You want your retirement accounts to be “money while you sleep,” not money while you fret, babysit, worry, work work work. For additional information on my nest egg pie charts, you can read my three bestselling books or attend an upcoming Investor Educational Retreat. See the links below.