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You Must Have a Plan When it All Hits the Fan

Kaeppel's Corner: You Must Have a Plan When it All Hits the Fan

Jay Kaeppel, Optionetics.com
March 16, 2011

In case you have been stranded on a desert island or otherwise removed from reality during the most recent fortnight, let me just say – wow, lucky you! For we have had some “trouble” of late on this little community we call Planet Earth.

Here at home, battle lines seem to be forming between public union employees and taxpayers, young and old, the middle class and the lower class, the lower class and the rich, and so on. The good news is that virtually everyone agrees that we all need to “tighten our belts.” Unfortunately, it also appears that virtually no one is willing to “go first.” Ah, unity!

Meanwhile the federal deficit last month was larger than the entire federal budget not that many years ago. Some argue that our total unfunded budgetary liabilities exceed 100 trillion dollars (good luck talking the Chinese into lending us that much money). Unemployment remains at stubbornly high levels, gas and food prices are rising, home prices (still) and the value (and stature) of the U.S. dollar are falling, and states continue to suffer severe budgetary problems. Here in Illinois we have cleverly attacked the problems by raising taxes sharply on individuals and companies, cutting all spending on drug and alcohol addiction treatments and eliminating the death penalty. That (and staying off the streets after dark) should pretty much solve everything. .

Unbelievably, things abroad have been even worse. Last week, one of the most important economies in the world appears, tragically, to have been washed out to sea. At least for some time to come. In addition, dictators (mostly those that were U.S. friendly) have been forced from power to be replaced by well, you know, whoever. Other dictators (mostly those that are U.S. unfriendly) have managed to retain their high office, primarily via the tactic of mowing down as many of their own citizens as required in order to do so. China and India continue to lock up as many sources of energy as possible so as to keep their economies humming, all the while spewing forth dreaded fossil fuels with nary a care about global warming. Meanwhile, many western countries continue to founder on the precipice of default.

And as if all of this is not dreadful enough, soon the Chicago Cubs will be playing baseball again (well, OK, such as it is).

It’s all enough to make you want to seek out a deserted island of your very own. But for better or for worse, most of us don’t have that choice. So what to do, what to do?

The Importance of a Plan

With almost any endeavor in life, the existence of a “plan” is essential to long-term success. No one achieves enduring long-term success because of luck. A break here and there can certainly help turn the tide or help someone at a critical make-or-break juncture. But again, long-term success comes via “design”, not “chance.” This is particularly true in the world of investing. Investing without a plan is like taking a boat without a rudder out on the ocean and hoping that the wind and tide will get you where you want to go.

An investor without a plan is destined to be buffeted from all sides by the endlessly undulating nature of the markets. When the market rallies he will find himself ebullient and filling with a sense of excitement as his net worth grows with almost no effort on his part. If he is like most, during the best of times (think late 1990’s) he will start to extrapolate his recent winnings ad infinitum into the future, and start making plans to retire early.

And then like spring follows winter, the market will show its “other face.”

Learning the Wrong Lesson (Part I)

During the great bull market of the 1980’s and 1990’s, literally an entire generation of investors learned the wrong lesson. They learned that the key to long-term financial success was to put your money into the stock market and (more or less) leave it there. Oh sure, if you could pick a hot stock or an up and coming industry here and there you might do better than the average Joe, but the point was simply that the stock market would make you rich, so just hold on tight. Or so they were told.

As I write the S&P 500 is at 1,282. It first hit that level on March 11, 1999. This implies that a “wise” investor who put all of his or her money into an S&P 500 index fund on that date has since made exactly a zero percent return over the past twelve years. Ouch. Big ouch. And the two major companies who at the time were guaranteed to dominate the world were Wal-Mart and Microsoft. Since March of 1999 they are up 9% and down 38%, respectively. Not exactly world domination type returns.

During the great bull run, investors forgot that between 1929 and 1954 the stock market gained no ground. Likewise, between 1966 and 1982 the stock market gained no ground. And now here we sit, twelve years into the latest “flat line.” And what are investors learning? Once again, the wrong lesson.

Learning the Wrong Lesson (Part II)

The easiest thing in the world for an investor to do today is to check the world, domestic and financial news, and assume that there is no chance that the stock market can make any meaningful headway in the years ahead. The longer the current “flat line” continues the more investors will withdraw into the cocoon of, well, near zero interest rates, or something besides the stock market. And this is simply human nature. But it is also a mistake. Don’t ever forget that the stock market feasts on human nature. When euphoria reaches its peak, so typically does the market. And when despair is the order of the day, a great buying opportunity generally lurks nearby.


So where to from here? I can’t tell you when the decline that started last month will end, nor can I tell you when or if the major averages will reach new all-time highs. What I can tell you is that you absolutely have to have some sort of well thought out plan if you hope to have chance to prosper. That plan must take into account the amount of money you have to invest, the percentage of that capital that you are willing to risk on a given investment, some sort of provision to cut a loss if something moves the wrong way, and a healthy respect for the overall trend.

All of investing can be boiled down to two essential elements:

1) An objective method for determining when and what to buy and sell that has a realistic probability of making money in the long run.

2) The emotional and financial wherewithal to employ that method consistently.

Without both of these elements in force you will likely spend years swirling in the abyss.

You know, like the Cubs.

Jay Kaeppel
Staff Writer and Author of “Seasonal Stock Market Trends”

Optionetics.com ~ You’re Options Education Site