Out of all the investing advice you’ll hear, probably the best is “buy and hold.” Like everyone else, I panicked slightly during the recent market meltdown. My brokerage and IRAs, combined, fell 4% in less than one month, on pace to cut my investments in half in the next year. However, with the Fed’s ridiculous intervention in the markets goosing the indexes, my investments soared 6% in the next two months, meaning that now from the period mid-July to early October I’m actually back in a gain position. That’s remarkable when you consider the recent run of huge one-day losses: down 300, down 200, down 400. After all of that, I still made money. Three cheers for interventionism!
Had I withdrawn my money in mid-July I would have locked in that 4% loss. By staying in, I not only didn’t suffer a single penny of realized losses, I was able to purchase some dividends at cut rates thanks to my automatic dividend reinvestment option.
Despite my own personal benefit, I don’t agree one bit with the Fed’s intervention. Taking a market that was 1% off all-time historic highs and making desperation rate cuts while pumping money into the banking system like Rachel Ray adding EVOO to a salad is not a good long-term move. I would have preferred to see a more thorough collapse finish the job on some of the cut-rate lenders out there, since theoretically we still live in a capitalistic economy. But the increasingly politically sensitive Fed saw differently and threw a bone to their buddies at the investment banks. At least as an investor in index funds my tiny raft got lifted up in the market tidal wave along with the insitutional investors.
Simply put, though, I invest my money and don’t move it out of the market. I still have doubts about the long-term ability of the Fed to continue to manipulate the markets successfully (you can’t cut already-low rates that much, and you can’t endlessly pump money into an already weakened dollar economy) but for the time being there’s no reason to believe they will let the markets correct even a small amount. So diversify to foreign stocks for the long term but the next time the US market tanks, rest assured that the titans of socialism, er, capitalism will be there to slash rates and hand out free money until the market shoots for new records again.