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Keep calm?!

from David Ruccio

All the advice today—as the the Dow Jones Industrial Average fell by 1,089 points in the morning and, at this writing, remains almost 450 points below the opening—has been the same: keep calm and carry on investing.


Ron Lieber is typical:

The impulse when the stock market falls hard for a few days in a row is to do something. Anything. Our life savings are often on the line, after all.

But that’s just the thing: Stocks are most useful for long-term goals. So unless those goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity. . .

One final point for new investors (and their parents and grandparents, who ought to be counseling them right about now): This is what markets do. There is absolutely nothing abnormal about what is going on here.

Most of us have to save somewhere, and history suggests that stocks are the most accessible route to get the returns you’ll need to retire someday. It would take decades of systemic economic erosion to prove otherwise, and a few days of market declines do not suggest that anything like that is upon us.

It’s true: many of us have been forced to have the freedom to keep our retirement funds in the stock market, as our employers in recent decades have gotten rid of defined-benefit plans and replaced them with defined-contribution plans. Thus, they’ve managed to shift the risk from themselves to us.

But the ownership of stocks remains profoundly unequal—and the responses to downturns are similarly unequal.

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According to the Wall Street Journal, from the 1980s to the peak of the dot-com bubble, families of all income levels were increasingly likely to own stocks, either directly or through retirement accounts. From 2001 to today, however, ownership of stocks has only increased among the top 10 percent of families; families at all other income levels have been getting out of the market entirely. Thus, as of 2013, nearly 50 percent of stocks and mutual funds were owned by the wealthiest 1 percent of Americans and an additional 41 percent were held by the next 9 percent. Meanwhile, the bottom 90 percent of U.S. families owned only about 9 percent of stocks and mutual funds.


Not only are the ownership patterns different between a small group at the top and everyone else; the people in those groups also behave differently.

According to Josh Zumbrun,

The Fed’s Survey of Consumer Finances shows that among the bottom 90% of households by wealth, families bailed out of the stock market between 2007 and 2010—the central bank’s study is conducted every three years—and between 2010 and 2013. The total share with stockholdings declined by 4.4 percentage points. That’s the equivalent of 5.4 million households selling stocks, even as the market rebounded. Only households in the top 10% have been increasingly likely to own stocks.

In other words, the ownership of stocks both reflects and contributes to the profound inequalities of U.S. capitalism.

“We haven’t come up with the solution to prevent people from doing it yet,” said Shai Akabas, an economist at the Bipartisan Policy Center in Washington who works on the center’s Personal Savings Initiative.

“But there certainly is a widening gap there in terms of the return that higher-income people are receiving in the market,” said Mr. Akabas. “Lower- to middle-income people aren’t privy to those gains. That’s exacerbated by the fact that many of them have taken their money out of the stock market.”

“Keep calm and carry on investing” is really only a rule those at the top can follow. The rest of us are caught between the Scylla of investing in the stock market (in order, someday, to be able to retire) and the Charybdis of getting out (so as to limit our losses on days like today).


You have to appreciate the language of some stock market observers, such as Valentijn van Nieuwenhuijzen, head of multiasset strategy at NN Investment Partners:

The selloff has developed a momentum of its own, says Mr. van Nieuwenhuijzen. “It comes against the backdrop of some fundamental reasons. Most obviously this is about China and the risk of a financial system crisis there. But sometimes the market organism takes over and develops a logic of its own,” he says. “We are at our most cautious positioning in the last few years,” with more cash in the firm’s portfolios that at any time in roughly the last four years, Mr. van Nieuwenhuijzen adds. [emphasis added]

And Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management LLC:

“Investors need to decide whether the recent moves are a sickness unto death, or just a bad hangover,” says Mr. Jacobsen. He says that he personally think that this is “just a hangover and requires time, perhaps in the form of a nap, to work-off.”


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  1. Jeff Z
    August 28, 2015 at 1:51 am

    Some of us, who happen to have a 401k, can not adjust at a whim every time a stock market burps or faints. There are only periodic windows where we can adjust. For me there is a yearly asset re-balancing, depending on how returns on certain assets in my 401k affected my ‘desired’ allocation to each ‘fund’ in the (limited) menu of choices offered.

    I will probably have to continue to save in this way for some time. There are often penalties for early withdrawal from retirement plans. I don’t choose which funds or stocks or other assets are on the menu – someone else does. For me it is an automatic payroll deduction. With phone or internet transfer very common in most commercial banks, the distinction between a saving account and a checking account erodes to almost nothing.

    The very wealthy very likely have options that I don’t, and obviously as a group control more assets as a whole than others, as these graphs show. But mutual fund managers, retirement fund managers, and other ‘sophisticated’ players may be looking to move assets around and look for yield, since their compensation is often tied to yields, amount of assets under management, or both. We have a BIG principal – agent problem here in conventional economic language. I may not be panicking because I don’t have the power to do that much, but those men and women in charge of these things have panicked, apparently. Even if they could see the writing on the wall, they would be unlikely to sacrifice their own compensation, and will do what everybody else did. Paraphrasing Keynes – better to fail conventionally. And as Egmont pointed out in a series of posts under “Quick Thoughts on the stock market and the economy” this has be foisted on us through changes in the law that amount to ‘institutional suicide’ (How I like that turn of phrase!)

    And lest you think that this affects only retirement, think about the endowments of higher educational institutions in the United States.

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