When Investing, Fearing Loss Always Trumps Losing Fear ~ The Risk Averse Alert

Saturday, April 25, 2009

When Investing, Fearing Loss Always Trumps Losing Fear

A quarter century's investment experience says the stock market's rout over the past year-and-a-half might not be finished.

How I wish this were not so. Believe me, I do. I wish perceived risk that recently swept over the world of finance like a dark, ominous cloud were, indeed, irrational. However I fear it is not.

Of course, I do not know with certainty what lies ahead. No one can. Still, I am in position to make a reasonable, educated guess. And my better sense says expect more trouble.

When investing, power to isolate near-term possibilities based on the recent past (as well as all of history) does not lie hidden in mystery. There are objective ways to assess whether moneyed interests in the stock market are likely poising to exploit relatively safe investment opportunity, or whether they are, in fact, fearing greater loss.

And right now I suspect it is the latter.

Don't get me wrong. Since last November my 401(k) investment capital has been positioned in the stock market believing some substantial portion of prior months' losses might be recovered. I thought a low-risk opportunity might develop, even if only this were to bring some respectable, relatively short-term, gain. Now, however, I believe even this prospect might prove premature.

I fear losing here. I wanted to tell you this because when it comes to risk-averse investing, fear is the driving emotion bringing you the best chance at making a bundle over the duration of your lifetime. Avoiding loss like the plague is a virtue because then you might better know when to put aside fear and confidently seize opportunity.

This is a skill that never grows old because risk and opportunity in the stock market simply know no age.

Opportunity typically follows bad times in the stock market ... and yet constantly needs assessing with fear as your arbiter. Right now, it simply appears there could be more trouble ahead. There's little evidence stocks are being accumulated with conviction. Rather, speculation rules. It's a traders' market. Likewise, the trend that's your friend has indexes trading below their respective 200-day moving averages, which themselves continue to fall.


Forget about it. I am zeroing my 401(k)'s stock market exposure, and putting the proceeds in a safe money-market alternative.

The market's decline at the start of the New Year was a lot worse than originally thought likely. Still, its subsequent recovery has revealed the essence of what I thought possible when in November I switched 401(k) investment capital to a diversified position in the U.S. stock market. However I am not so optimistic the market's move to the positive will continue much longer.

The recovery opportunity for those whose 401(k)s got clobbered last year has proven less helpful than was hoped. Surely, a more promising moment will again become present. In the meantime one's 401(k) capital is best preserved in a money market fund.

If by chance your 401(k) has been safely positioned out of stocks since last May, then congratulations. You are way ahead of the game because you are avoiding deep losses like the plague.

If, however, you were not so fortunate, then stay tuned. You will find low-risk opportunity to recover your losses. Right now is not one such moment.

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

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