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How To Deal With The Schizophrenic Stock Market

by retirebyforty on August 10, 2011 · 41 comments

in investing

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stock market roller coaster

Wow, it’s been quite a ride this past week. The stock market roller coaster is not for the faint of heart. The debt ceiling deal was signed by President Obama and all hell broke loose after that. The investors stepped back, looked at the economy and saw that it was not doing well. In addition, S&P downgraded the US credit rating from AAA to AA+.

I thought the interest rate would go up a bit with the downgrade, but the opposite happened. Usually, if a security is more risky, the interest rate rises to compensate for the risk. However, the US bond interest rate lowered even after the downgrade. This happened because investors still trust US bonds and they have no confidence in the stock market. Many investors sold their stocks and moved their money to the safer US bond, driving the interest rate lower. The credit rating might have been downgraded, but US securities still the best game in town. Unfortunately, I locked the rate for our 4 plex financing before the interest rate dropped. This week, the rate is down 0.125% from 2 weeks ago. Doh! This will teach me to not assume anything.

Back to the stock market. The uncertainty of the debt ceiling debate, economy slowdown, and S&P downgrade all drove investors to act.

As an investor, here are some of our options.

  1. BUY more stocks. If you have extra money in the emergency fund, this might be a chance to get some quality stocks for a discount.
  2. HOLD and stay the course. Go have a slushy, enjoy the summer, and ignore the news. Let the auto contribution do it’s thing and dollar cost average.
  3. SELL first, ask questions later. Many investors sold their stocks on August 4th. This prevented further losses, but the herd mentality also drove the stock market lower.
  4. SHORT the market. I think this is very risky, but many people must have been making a lot of money over the last few days.

I confess that I’m the investor #2 in this list. We have been through the dot com bubble and the 2008 down turn so I’m somewhat used to the roller coaster ride. I don’t have a conniption anymore when the DOW drops 600 points.

This year, we have a few extra dollars in our emergency fund so I think I will invest in a few quality blue chip stocks during this downturn. I’ll also take this chance to contribute to the 529 by investing $2,000 now and then $2,000 near the end of the year. This will spread out the risk a little bit. I guess I’m leaning more toward #1 this year. I am terrible at market timing so I’ll leave #4 to the professionals. There is no way I can get rich shorting stocks.

Our investment timeline is still 20+ years and I know there will be downturns here and there. If I had needed to withdraw money next year, I would have been panicking a little bit. Then again, I would have most of my money in a safer investment like the US bond.

What about you? What have you been doing over the last week? Did you give yourself an ulcer from looking at the stock?

roller coaster photo credit – flickr _PaulS_

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{ 37 comments… read them below or add one }

Jeremy Belmont August 10, 2011 at 2:10 am

Stocks are often overvalued and very volatile. Real Estate is harder to buy since it involves brokers. However, the building materials and land always will hold some type of solid value unless the whole town goes under water! Real Estate bought with 30% or more down is not a get rich scheme, but would be very stable for the long run.

Jeremy Belmont is the author of the 123notary.com BLOG http://blog.123notary.com/ where people can learn more about the notary profession and all that it entails.

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LifeAndMyFinances August 10, 2011 at 4:10 am

For me, the stock market blips don’t mean much. Actually, they are somewhat of a good thing because I’m still under 30 and have a long future of investing ahead of me. That puts me in your #1 category. I’m continuing to buy stocks at a discount! If they go back on the rise, I’ll make quite a large return by the end of this year or next. :)

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retirebyforty August 10, 2011 at 3:25 pm

That’s how I feel too, but I think if I’m going to retire early I will have to change that outlook. We’ll have to be a bit more conservative if we reduce our contribution.

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Kevin @ Thousandaire.com August 10, 2011 at 5:47 am

I’m with you on #2. If it starts falling further, I will buy at some point when I feel the market is ready to rebound. I got my start in investing in March of 2009, which was a great time to buy in. Hopefully my timing is just as good this time around.

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retirebyforty August 10, 2011 at 3:26 pm

Good luck! I’ll drop by and see how your investments are doing. I know you like to use margin so….

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LLF August 10, 2011 at 6:41 am

This week is not any better os far. Monday was awful with the giant plummet, but Tuseday saw lots of gains. Most stocks I follow had gains yesterday. Let see that today does. Of course this is only for day trading, not for everyone. I would say wait a week and look to buy and hold for the long term.

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retirebyforty August 10, 2011 at 3:27 pm

Wednesday is another ride down. Pretty crazy.

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Miss Wallstreet August 10, 2011 at 7:13 am

I’m definitely the number 1 investor. I have been buying into the dips. I trade forex ongoing but for stocks I am a buy and hold investor. I’m excited to see the returns once the market comes back.

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Miss T @ Prairie Eco-Thrifter August 10, 2011 at 7:59 am

We are also on the long term plan so we are not to worried about the current state of things. It will pick up again like it always does and because we don’t need the money right away the pressure is off. In 20 years, like yourself, when we need the money, it would be a different story if this happened then too.

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retirebyforty August 10, 2011 at 3:28 pm

Right! In 20 years, I probably move 60-70% of the investment to CD or bonds to be more conservative.

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Freddie @ Invest With Passion August 10, 2011 at 8:53 am

The market opened this morning and quickly lost all the gains from yesterday. It is so emotional out there it is crazy. Wonder how today is going to end?

Long term seems to be the only way to go unless you are pro, then the swings could make you a fortune if you can determine what is wagging the market and how it will be wagged.

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retirebyforty August 10, 2011 at 3:28 pm

It’s a pretty crazy ride this week. Hope you have the stomach for it!

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Kellen August 10, 2011 at 9:36 am

I would do #1, buy more at a discount, but I buy mutual funds through auto investments, so it’s tough to buy at exactly the time I want. (i.e. yesterday after the Fed announcement, rather than right at the close yesterday.)

So I’ll probably stick more with #2, which has been my strategy all along.

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retirebyforty August 10, 2011 at 3:29 pm

If you’re just starting out dollar cost averaging is the best way to go. I think once you have a big portfolio, you’ll have to be a lot more conservative.

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krantcents August 10, 2011 at 10:46 am

I am sticking with my plan. I may adjust my asset allocation at year end, but no other changes. In fact, I still buying in through my payroll deduction (retirement savings).

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retirebyforty August 10, 2011 at 3:30 pm

I wonder what your allocation is like since you are a bit older and are about to retire. Maybe you can write a post about this.

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krantcents August 10, 2011 at 4:36 pm

My situation is somewhat unique because my everyday expenses will be covered by Social Security and a pension. In addition, I will have full health coverage (at no cost) as part of my retirement. So I still want to have my investments grow. After all I expect to live another 30 years.

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retirebyforty August 10, 2011 at 8:31 pm

Excellent! My father in law is in similar situation and I think it’s great! It’ll be so much harder for the younger generation.

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Paula @ AffordAnything.org August 10, 2011 at 11:50 am

I’m doing both #1 and #2 — holding what I have, and buying a few thousand extra! I have 40 more years to ride out this wave …

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retirebyforty August 10, 2011 at 3:31 pm

40 year? Are you 20 years old? ;)

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cashflowmantra August 10, 2011 at 12:46 pm

Number 2 is what I have been doing. Although I must confess that I did buy some INTC since the yield had crossed 4%. Since I am wanting to get a few more dividends, I just couldn’t pass it up. I spent Monday at King’s Island so it was a perfect day to ignore the market. Slushies are great!

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retirebyforty August 10, 2011 at 3:31 pm

I’m planning to buy a few more shares of AT&T. We’ll see how they look tomorrow.

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Doctor Stock August 10, 2011 at 3:33 pm

Great article… first time here (I’ll definitely be back now that I joined Yakezie).

Here’s my thoughts on the options you presented:
1. Sure, but wait until there is upward momentum. People who bought this morning or late yesterday may already be experiencing buyer’s remorse as the markets dropped.
2. There’s no point holding on to a falling knife so to speak… better to separate yourself for a while and re-engage when the time is right.
3. Well, there is always a time to sell… and as soon as one buys, they need to have a plan to sell. That’s not to say it will happen for a while, but that plan should be revisited each week.
4. I agree that shorting is probably for the advance. Instead, investors could buy inverses such as SH, PSQ, DOG, etc. It’s a great way to “trade normally” and make money when the markets drop.

Well, those are my thoughts… thanks for letting me participate.

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SB @ One Cent At A Time August 10, 2011 at 6:04 pm

I am playing long term game, bought a few last week, will hold for years.

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MoneyCone August 11, 2011 at 7:34 am

Love the mash up of the roller coaster with the graph!

I actually bought a few boring stocks in my taxable account and a few high-beta stocks on my ROTH. Not too worried.

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retirebyforty August 11, 2011 at 3:33 pm

I picked up a few shares of AT&T for dividend. :)

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Justin @ MoneyIsTheRoot August 11, 2011 at 8:09 am

My solution is investing in dividend stocks!

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Financial Success for Young Adults August 11, 2011 at 9:08 am

For now I am picking up bargains in my Roth. I expect the markets to rebound soon and I want to take advantage of this fire sale.

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Squirrelers August 11, 2011 at 2:19 pm

I’m in camp #2. I think that the volatility will continue to be high for at least the short term, hopefully not as crazy as this, though! Anyway, I like to think long-term, unless I see reason to sway. I’m staying with that for now, but I don’t see this as a big time for bargain hunting….unless we see a few consecutive days of massive losses, then get back to me:)

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Ben August 11, 2011 at 5:05 pm

Since I am such a young fellow <30 I view these as good buying opportunities, and statistics agree saying often times these markets come back stronger than before. If these markets scare you then buying the VIX or volatility index and purchasing puts can protect some of your capital in turbulent markets. It is important to have these in place before or at the beginning of trouble because it becomes more expensive as investors become worried.

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Evan August 11, 2011 at 7:16 pm

Gut screams at me to buy more! That being said I am too involved in cash accumulation – I am sure I’ll kick myself in a year or two

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Money Reasons August 11, 2011 at 7:32 pm

I had a decent percent sitting in cash in both my regular account and my Roth IRA. After the big dip on Monday, I bought some more shares of stock that I know, just so I could play the market a bit in my Roth IRA. Today I cashed out of it for a cool 10% gain (fun really).

As for the rest of my money (the real money), I just sat on it “Holding” and grimaced as the market took on the characteristics of a yo-yo…

This morning, in my regular account, I bought some shares of a pharmaceutical (“MRK”). I’m not sure if I’ll stay in it though, it was kind of impromptu…

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Little House August 12, 2011 at 11:36 am

Held. Peed my pants. Sold. Now I’m thinking of buying again. Perhaps I’m schizophrenic?!

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retirebyforty August 12, 2011 at 5:56 pm

If the fluctuation is too much for your stomach to handle, you’re probably taking on too much risk. You should be able to assess your risk tolerance better now that you’ve gone through the crazy week. Maybe have more bond and less stocks?

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Little House August 13, 2011 at 10:31 am

Thankfully we don’t have too much tied up in stocks. But this past week definitely influenced decisions we made with our shares! I’ve balanced out my risk with mutual funds that are really conservative. I feel a little better now that the week is over. ;)

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Buck Inspire August 14, 2011 at 9:06 am

Since I went through the dot com and real estate bubble, the 600 point drops are easier to swallow. I’m usually a long term investor and am trying to push myself out of my comfort zone to dabble with some bargains.

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Invest It Wisely August 16, 2011 at 5:12 am

I’m #2 because most of the funds are in RRSPs and I’m not going to sell those, but I could lean toward #1 if prices fall far enough, too.

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