Profile | Jerry Slusiewicz
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The Crash of 2008
By Jerry Slusiewicz | October 10, 2008 | 11:42 AM | 3 Comments
By now you have all come to realize that we just had the biggest stock market crash of our lifetime! The market's behavior is unprecedented. From the high three weeks ago (Sept. 19th) to this mornings low, the S&P 500 is off 33.7%. This is worse than the depths of the crash of 1987.
From Wikipedia: "A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. Stock market crashes are social phenomena where external economic events combine with crowd behavior and psychology where selling by some market participants drives more market participants to sell. Crashes usually occur after extensive use of margin debt and leverage by market participants." Has anyone heard that our financial companies are deleveraging?
With today's headlines: "The End of American Capitalism", "Global Financial Meltdown", "Is GM Heading for Bankruptcy", it's no wonder investors are panicking. When panic prevails, clear decisions are not made, and opportunity arises. These problems did not start three weeks ago. This problem has become more and more obvious over the last year. The signposts were all there. Failed government sponsored bailout followed by several more government sponsored bailouts. The effect of each bailout had a shorter and smaller positive effect, until finally the $700 billion TARP plan caused an immediate sell off in the markets. The markets were clear that there was nothing that was going to cause a change in direction for the market.
Now we have to figure out what do we do? First one has to understand this basic principle; when prices go down in a market - risk gets reduced! It is not the other way around. The average panicked investor seeing their portfolio drop is not very clear on this. On the recent Green Faucet Video I did with Jim Slagle, I described what market capitulation would look like. The market would open with another major sell off day where the Dow would be down 500 plus points early. Then as we got closer to the close the market would rebound on huge volume and close flat or positive at the end of the day. So far today looks like it fits that bill. However I have been saying that everyday. Watch the close closely! The rally has to last to the end of the day. Do not jump in with everything you have either - start modestly.
The primary lesson to be learned from this recent debacle is that risk management MUST become an integral part of your investment strategy. Not all investors or advisors are created equal. I have been writing, preaching, recommending, and have been invested 100% in cash for the last couple months, thereby avoiding this entire crash completely. How did that happen? Through a disciplined risk management system, employing stop losses and some common sense.
Very soon, if not today, we could have a very nice trading bottom that will probably give an opportunity for a 15 -20% positive bounce. While that could be a nice reward for your portfolio near term, the bigger reward will come in the future if you commit today to use a more disciplined approach for managing the risk on your money. You too could have claimed to have missed the biggest stock market crash in your lifetime! If you would like a free review of your portfolio call me at (800) 449-9501.
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Comments (3) | Related Topics » The Market
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