Sunday Musings: Reasons To Worry

Jim Jubak wrote an article recently that caught my attention. It’s titled “8 Reasons For Investors To Worry.” Let’s listen in:

Has economic volatility in the US and abroad left you somewhat twitchy? That isn’t necessarily a bad thing. The trick is figuring out how best to expend your anxiety.

This is my fourth take in less than six months on how to worry.

I wrote the first one in October, when the Dow Jones Industrial Average had poked its head above 10,000 for the first time in a year and the Standard & Poor’s 500 Index was just about to kiss 1,100.

Now I’m writing on the topic just days after the Dow industrials touched 10,000 again, but this time headed in the other direction. The Dow closed at 9,908 on Feb. 8.

In October, the worry was that the stock market had gone up too far, too fast and was ready for a fall. Now the worry is that the long-feared decline has finally arrived and that it will be much worse than the correction that investors have been waiting for. Or at least that’s the fear.

All this history tells you something about how tough the past four to five months have been on investors, who have been through two bear markets in less than 10 years and are justifiably inclined to jump at every bit of news, good or bad.

Jumping at every bit of news is actually not bad behavior. The lesson of the past decade is that investors can easily get too complacent.

Remember the saying: You’re not paranoid if they really are out to get you.

Buy-and-holder beware

I just came back from an investment conference in Orlando, Fla., where I heard a number of speakers proclaim that the 60% rally off the March bottom proves that buy-and-hold investing is alive and well. Well, frankly, I think all that remark proves is that complacency is alive and well even after two bear markets have left many buy-and-hold investors looking up at 0% for the decade.

The challenge now is to pay attention as you should — but to separate the real worries you need to act on from the day-to-day flow of noise. If you act on every bit of noise that causes a moment’s worry, you’ll do a good job of turning your portfolio into a profit center for your broker. But you won’t be doing your own returns any favors.

That still leaves us all with an important question: If some of this news is just noise (and not worth acting on) and some is important in the real world (and worth acting on), then how do we tell the difference?

And that’s where my “how to worry” list of what’s real-world important to worry about and when comes in. By listing the potential turning points in the stock market over the remainder of 2010, “how to worry” indicates what news might be worth acting on because it has a good chance of moving stock prices for more than a day or two or three.

The goal is to put together a list that tells you 1) what the chances are that something will go wrong, 2) how bad it might be if something does go wrong and 3) when things might go wrong.

Jim goes on to list 8 major worries that are all valid. Please see the above link for details. While the underlying theme makes sense and can provide hours of discussion, I don’t see a good way how you can use these 8 worries as a tool to manage your portfolio. Some of these events may very likely happen sooner or later, but the timing is the big unknown. This is a perfect example of making a good economic analysis yet not being able to utilize that knowledge to stop worrying about your investments.

To me, using trend tracking is a far easier and effective way of cutting through all the fundamental noise and actually seeing where the direction of the market is headed. Sure, as we’ve seen recently, a whipsaw will be part of the equation but in my mind it sure beats the alternative, which is wading through reams of economic facts and still not knowing when to sell, buy or head for the sidelines.

Bottom line is that while Jim’s article was well written and researched, it does not alleviate the fears or worries many investors have. Only by having a clearly defined plan of action, which includes specific entry and exit points, will you be able to sleep better at night. At least that’s how it works for me.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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