Bear-Market Rally, Recession - Now What?

These are interesting, and complicated, times for investing.

The U.S. stock market peaked 18 months ago, during which time there have been some questions answered and some new questions raised. While there are a few signs of "green chutes," the best indicator, the stock market, continues to stumble along near a bottom.

Pimco's Mohamed El-Erian recently made a rather loud case for not buying stocks or government bonds on CNBC. There is news about colleges slashing budgets due to poor endowment results and news about pension plans needing to take risks previously unconsidered to meet pension obligations. Those headlines prod individual investors to consider their long-term investment plans.

Coincidentally, I have had two media requests this week (one local and one national) on the topic of what investors should do after their investments have fallen 50%, the month-long rebound notwithstanding. Making large portfolio changes after a big decline and in the middle of a deep economic recession is problematic for many reasons.

There have been financial crises before and, while the details are different, there are similarities. Similarities include a big, fast decline and several hope-raising bear-market rallies. Similarities in sentiment include denial of the problems early on in the crisis, panic as the declines accelerate and the growing belief that this time is different.

Making financial life-altering decisions is simply the wrong thing to do in the middle of a crisis. Emotions are more at play now than two years ago. How many times has more emotion helped make a situation better? More emotion likely means less logic. A financial plan calls for savings and compounded growth of those savings. You already know that we collectively do not save enough for the future. An insufficient savings rate and a lack of compounded growth add up to a longer work life and the danger of running out of money.