It looks like market is up today b/c of ppl still seeing the bottom of the market (after the two day 1000 pt drop). As I told J last night, we've really been sold a false bill of goods. There is this belief that if you buy into the market, over the long run, you will have nice (better than savings account) gains. In the end, see this for what it is... a "belief". It is neither a fact nor a sure thing. Just a belief that has happened to be true as long as we've been recording this kind of data.
My not-at-all-financially savvy mother told me when I turned 18 that if I ever get returns on my (passive) investments that are better than your average bank rates, it is gambling. It has the potential of disappearing any day. So from her advice, whatever money I'd put in the stock market, I have tended not to count in my net worth (that would be in my head b/c I wasn't very interested in this stuff for all of my 20s). In fact, I was so bad about counting my stock investments, I "lost" some for a long time (I've bought maybe $5k worth of stocks from employee purchase programs at 2 listed companies that I've worked for in the past). It was only once I married my husband, who is much more conscientious about these things that I dug up the paperwork on these shares. (We subsequently sold the stocks and put the money towards my law school tuition.)
There are those who are buying now on the expectation that in the long run, they will see explosive gains. I think that the market is closer to the bottom than it has ever been in my adult life, so buying in wouldn't be the worst thing, but I don't believe that the gains will come back in any way like we've seen in the past 20-30 years. The pain that we'll have to endure over the next few years will make people and companies a lot more cautious. Caution = slower growth.
Maybe in 30, 40 years (if we see the real boom in the markets as starting in the 80s - that would be 40 years after the depression) people will have forgotten about this recession and start losing their heads again, but by then, I'm going to be drawing down my savings. So the next growth spurt will be for my children to enjoy.
As I've mentioned before, I'm not buying into the market right now (and have cut my retirment contributions) for two reasons: (1) I don't think we've hit bottom yet and (2) my family desperately needs to build up our emergency fund (8 months of EANRNINGS, we're almost 1/2 way there). I like Escape Brooklyn's sidebar that tracks her three extraordinary expense funds, but it looks like she built it herself (it's not a widget). Maybe someone can point me to such a widget?
Of course we can never know what the market will do or what the future holds for individual accounts or the market generally, but I think if people believe that they will ultimately prosper in the long term, they will be less likely to pull out of it. And when lots of people pull out, that's can't be good for the market.
You say you "don't believe that the gains will come back in any way like we've seen in the past 20-30 years," but isn't that also just a belief? You base it on the assumption that we'll all be suffering for the next few years and that that will make people cautious, and I guess I just disagree that we will all necessarily suffer in the coming years. I think that will depend in large part on how the next leader of this country and his Congress act. I'm sympathetic to the Amity Shlaes view (what little I know of it) that one reason the Great Depression lasted as long as it did and hit people as hard as it did was Hoover's institution of Smoot-Hawley and Roosevelt's subsequent reign. It didn't have to happen that way. True, things could have been worse, but they also could have been better.
All that, and I still am optimistic that over the long-term I will have gained by staying in the market (and I'm older than you so I'll be aging out sooner). We can never know, huh? :-)
Posted by: dgm | November 07, 2008 at 09:18 PM