The above is no doubt an oversimplification, but it presents a gist of worries, rational or irrational, behind the recent worldwide sell-off of equities. It may not be an unreasonable reaction to such uncertainties that investors, seeing both their hard-earned real estate and stock market investment dollars evaporating, have been at least selling their liquid assets, which, of course, tends to depress the markets still further, and so on.
Hence my title question, is it time for a panic state or to reallocate? Conservatively allocated investors, with about 10% of their liquid investments in cash reserves such as money market accounts, around 30% in intermediate bonds or bond mutual funds, and roughly 60% in growth and income stocks or stock mutual funds, and who have been rebalancing along the way, say every year or when those allocations are off by 5-10% or so, have probably been doing well over the long-term. Through the nineties and early 2000, when the stock market was first way up and then way down, folks following this approach would probably have seen a ten-year annualized total return on their liquid investments of about 16-17%, despite the sudden drop in stock prices in the first quarter of 2000. Unfortunately, that was then and this is now. Investors are unlikely to see well allocated ten-year total returns like that again for some time, but they can still assure lower risk growth of their assets by putting funds into different type assets and then rebalancing among them after major turns in the market.
And if after the 2000 and 2002 major drops in equities investors had then reallocated again, once those market downturns had provided many new bargains, they no doubt would on average have made out like bandits in the years since, while equities have been back up over 68%, on the Dow for instance, or 76%, on the S&P 500 Index, through 7/19/07.
After the recent sell-off, the Dow is still up 57% since its level at the end of 2002, while the S&P 500 Index remains up 64% in the same period.
And if one had invested in low price to value assets since 2002, one's annualized returns from a well allocated portfolio could have been still better and quite satisfactory.