Tuesday, February 27, 2007

Stock Spaz Welcomed With Open Wallet

THE FINANCIAL MARKETS DID their best imitation of a sake-crazed kamikaze pilot today, with the Dow alone dropping 416 points. The other major indexes followed suit, with sellers outnumbering buyers on the order of 20:1. The folks gathered on the podium balcony at the NYSE looked distinctly relieved when the session was rung to a close.

Strangely, I am unworried. As a 401(k) investor, I have an interest in seeing my mutual funds grow. I certainly checked them when I returned home. But I wasn't panicked. This represents a reversal of demeanor from what I would have exhibited less than 10 years ago. Expensive lessons learned from the dot-com rollercoaster have given me a distinctly longer view, and a greater appreciation for index funds and diversification, than I had as a fledgling investor last decade.

In October, when I flipped my old 401(k) money into my current (and soon to be former) company's fund, I let it enter the money-market option. I then spent the rest of the year moving the lump sum into the specific mutual funds in preset chunks each week. I wanted to take advantage of dollar-cost averaging and buy lots of the funds at lower prices if I could. This way, if 2007 represented an end to the rally roaring along since July 2006 and, more broadly, the beginning of the Iraq War, I at least bought some of the lots more cheaply.

This worked well. The market ascended through the end of the year, so when 2007 hit and I was able to begin depositing new cash into my 401(k), I had already realized a gain. I have been contributing the maximum, to get as much of my remaining paychecks under the shelter of the tax-advantaged plan, and if I had had the option, I'd have deferred each paycheck between now and my layoff into the 401(k). Alas, they max out your per-check contribution at 50%. Pansies.

By coincidence, last Friday was a payday, and our 401(k) funds deposit after market close the following Tuesday. This means my purchases tonight will be at a significant discount to the fund prices I paid a fortnight ago. (Yes, I typed fortnight.) It says something about me that I went home smiling about this prospect.

After losing significant amounts of money in the tech crash, I finally accepted the wisdom of allowing index funds with low expense ratios represent the backbone of my portfolio. I do intend to fill out those larger indexes with exchange-traded funds that capture the Russell small-stock indexes. This is not to say ownership of individual stocks is wrong. I simply don't have the time to research, build, and monitor a properly diversified portfolio. With joblessness looming, what cash I have is best kept liquid. As for short-term ownership, I try to scotch those get-rich-quick urges by applied financial-probability research in the guise of my weekly poker game. Jim Cramer is absolutely right when he writes that, as emotional, impulsive human beings, we all need a speculative owning in our portfolio to satiate our urge to gamble. Mine would probably have the ticker symbol POKR.

This summer, I tested myself to see if I had the demeanor to own a single security and not monitor its progress all day. I bought a small amount of a large-cap tech stock shortly after it issued positive earnings. I kept checking the price via a Mac desktop stock widget, reading about it on the Web, and calculating how much I would make if I sold it at a certain point. I eventually decided enough was enough and sold for a small profit after 3 business days. As is typical for quick in-and-out buyers, the stock spent the next 4 months adding 6 more points, indicating that either I had to own multiple, diversified companies, or merely do what I was doing and let index funds and dollar-cost averaging do all the heavy lifting.

I don't intend to touch my 401(k) money for a good 30-odd years or so. The gyrations of the past 10 years have shown me how consistent, measured purchases across time are better suited to my attention level and temperament. I'm tickled pink to get more chunks of shares tonight at a discount price, because long term, these shares will go up with the indexes they track. Should I find myself with more time and a more comfortable cushion of cash, once my job situation stabilizes, perhaps then I will fill out my retirement income with some securities purchases. I'm in no rush, though. Treasury bonds are returning an annualized 5.268%. You cannot beat that with a stick. I believe I'll take that risk-free five points and let the market mayhem play itself out as it may. With, of course, my weekly nighttime daytrading in POKR shares.

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