Buying Stocks at "The Point of Maximum Pessimism"

By on September 19, 2008 in Current Events with 0 Comments

The stock market has been moving like a yo-yo in the past week with considerable drops on two days and a big run up shortly after a rapid fall. There is talk in the financial press of a possible failure of the American financial system. Some money market funds are in danger of actually losing money. No doubt, there is an extreme lack of confidence on the future of the American stock market.

We will find out in the next couple of weeks how Thrift Savings Plan investors have reacted to this fast moving train. But, while we do not know the final figures today, there is little doubt that some readers have been pulling their money out of stock funds and seeking the safety of the G fund and the F fund.

That is a logical move. It can also be an expensive move if these investors are guessing wrong. As noted in our recent article, the late Sir John Templeton, who became wealthy by taking risk during a time of market uncertainty, said that investors should buy stocks at the "point of maximum pessimism," when market sentiment stinks and no one wants to hold anything but cash. (Don’t let the British fool you: He grew up in the small town of Winchester, Tennessee.)

Of course, when you are retired or planning on retiring in the very near future, and you are watching your TSP portfolio sink steadily lower, emotions become intense and the urge to sell becomes intense. No one can predict the future and those who moved money into the G fund a few months ago are undoubtedly richer than those that have left their money in the C, S and I funds as the market has gone down.

For what it is worth, here is a chart that displays the effects of Sir John’s wisdom about stock investing. The stock market has always come back–although it can take awhile. Some TSP participants have undoubtedly been moving money into the TSP stock funds this week . Because, while we don’t know if the market has reached a bottom or will continue to drop, there is little doubt that there is panic in the streets and, if we are not there, have been "at the point of maximum pessimism."

Here is a chart compiled by investment adviser Dan Weiner that shows how much the stock market went down in one day (reflecting the "extreme pessimism" referenced above) and how the same index had reacted one year later. The chart uses the S&P 500 index as a data point. This index is the one used by the TSP’s C fund. (You can see the specific figures by holding your cursor over the a point on the chart.)

 

What always makes stock market investing a challenge is deciding when to invest in stocks, when to pull back or making a decision just to stay put and ride out the inevitable storms. Anyone who is telling investors with certainty that a particular time is a good one to invest (or not) may be trying to sell you something as there is plenty of evidence that predicting short term market trends is a futile exercise. I do not pretend to be able to tell readers how the stock market will react to the rapid stock market decline this week.

The best you can do is to make your own decisions and to act accordingly. While it is not possible to know what actions our government will take on the economy or how the market will react, we can look back at past periods for guidance. We hope that this information will help our readers make good decisions for their future (or current) retirement security.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters onĀ federal human resources.

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