Listening to Market Predictions: Do Not Get Caught Picking Your Bottom

The media is having a field day with the market decline. People who wouldn’t normally be interested are watching CNBC or Bloomberg TV and reading the business section. If you are making predictions of Dow 2000 or Dow 1000 you will get on TV or quoted in the newspaper. Now there is also a big incentive to call the bottom of the market. The person who randomly picks the bottom will become famous but many who follow the predictions of bottom pickers will get nothing but losses. There is an old Wall Street saying that goes: "Don’t pick your nose and don’t pick bottoms."

What is the right thing to do?

If you have a 401k:
Stick to your strategy. Keep your allocations the same and your ongoing investment allocations to equities the same. Falling stock prices mean you are buying more of the market with each investment period.

If you have a brokerage account:

Diversify. You have no idea which company will be next to fail. You are better off making sure you don’t have too much exposure to any one company. That hurt me when Lehman failed and was my wake up call. That laziness kept me from properly diversifying my exposure away from Lehman and financial stocks in general. After that collapse I sold enough of any stock to which I had an exposure of more than one-percent of my portfolio. If I didn’t have a good alternative to buy, I bought a combination of (TIP -$94.62) (inflation indexed treasure notes ETF) and index funds (mainly the Vanguard All market exchange traded fund: (VTI – $43.02). In that way, I’m exposed to the stock market and also protected against all the inflation these global bailouts will eventually cause.

Disclosure: I still own some defunct shares of Lehman. I own VTI and have recently bought more in this falling market. I own TIPS, and after selling out of my entire position months ago at 106 and above, I’ve now bought back in. I try not to pick my nose in public and I will not try to pick a bottom but will continue to buy value companies on the way down whose valuation, based on a lack of debt and lots of cash on the balance sheet, makes sense.