Bull vs Bear and Why My Head Hurts
Listening to the talking heads each day has started to make my head hurt. It’s so easy to get caught up in the daily chatter of the markets and begin to think that you should be making drastic changes to your 401(k). Is it a new bull market or a bear market rally? It seems like on a daily basis, we can hear “convincing” arguments for both sides. While the topic is important and relevant, I think it is a debate that most retirement investors should ignore.
Overall, opinion on the subject is largely divided. Those who believe it’s the beginning of a new bull market argue that the downturn is mostly behind us. We’ve seen improvements in housing, consumer sentiment, the financial sector and manufacturing. They also argue that the massive government stimulus has yet to take effect, which should bring further near-term stabilization to the economy.
Those who say this is a bear market rally point to continued job losses, which may keep downward pressure on the market. In addition, credit conditions remain poor, which in their opinion will make a sustainable recovery difficult as prospects for growth in the near-term look dim.
Despite the confident claims you may hear, no one knows for sure which direction the market is headed over the next several months. The market reflects the view of where things are going, not where they’ve been and at times can behave irrationally. In a recent shareholder report, Warren Buffett said:
“…neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”
What does all of this mean? If you’re reading this, you are most likely an investor, not a trader. In the grand scheme of things, whether this is a new bull market or just a bear market rally shouldn’t influence your overall 401(k) strategy. The market can quickly move in either direction near-term, but over time we believe the long-term opportunity it presents offers the best way to save for retirement. Another positive aspect of a long-term strategy is the use of dollar-cost averaging, which allows you to buy more shares of the same investment near market bottoms and less at market peaks (assuming you invest the same amount of money at each point).
Should you tweak your holdings based on market conditions/changes – yes, if needed; should you make major investment decisions based on a guess of where the market’s headed in the next few months – we wouldn’t recommend it. Invest for your situation, keep contributing, maintain a long-term focus and leave the bear vs. bull debate to the talking heads.
Kevin Jaegers, Senior Investment Advisor
May 17th, 2009 at 10:49 am
I am a new member and love your website! Since I have two funds at my employer, one with a match and one without. I changed the one account to your recommendations and left the other the same. While two weeks is not a lot of time, already the portfolio your advisor suggested is already yielding a higher %! Smart 401 K has already paid for itself. My question is –would it be better to stop contributing the extra (not matched) that I am to the Hartford outside of my company? I think that I should do this to get into better funds. Your thoughts.