The business cycle

Dear Mr. Berko: 
My wife and I each have a 401(k) plan and joint account. Her brother-in-law, a certified financial planner, gives us financial advice and wants us to go to 75 percent cash. He and other well-known experts are certain the market is going to have another Black Monday crash next year, which would kill our accounts. He’s very convincing. But Goldman Sachs, Merrill Lynch, the Federal Reserve and other prominent analysts see steady, slow but strong growth ahead. After what the economy has been through, I can believe it could crash again. But at ages 49 and 47, we’re scared of a crash because we won’t see it coming. What investment advice can you give us? Do you think we will have another crash? 
— BR: Erie, PA
Dear BR: 
Of course we’ll have another big stock market crash. However, like most folks who don’t understand the market, you make the mistake of ascribing long-term consequences to short-term events. Every time market has crashed, it’s recovered even higher.
In June of 1997, page 86 of Business Week Magazine: “Six years into the economic expansion of the 1990s, and the living is easy. Almost 3 million jobs have been added over the past year alone, and consumer confidence is soaring. Company coffers are brimming with profits, the stock market is in the stratosphere and inflation is actually falling. Perhaps best of all, it seems the good times can go on for years. That old bugaboo of capitalism — the business cycle — has been tamed.”
We own pot-bellied pigs, pythons, iguanas, llamas and even alligators as pets. Americans are the dumbest consumers in the free world, and the reason most American families don’t own an elephant is because no one has figured out how to buy an elephant for $100 down and payments of $100 a month. And now automobile companies will finance a $15,000 car over 6 years at $250 a month, even though in 3 years that car will only be worth $6,000. I  remember asking a young man how much he pay for his used Toyota? He answered: “$183 a month.”
That wasn’t the answer I was looking for so I asked again: “What did the Toyota cost you?” He answered again: “$183 every month,” with an annoyed look on his face, suggesting I didn’t understand the King’s English. His father finally told me that the boy paid $17,000 for the car. I’m convinced that the financial IQ of most Americans is below freezing. We are a nation of consumer stupids who believe credit and monthly payments are entitlements.
Stop wringing your brain in fear of a stock market crash. As certain as the sun rises in the East, it’s just as certain that the Dow Jones average will have another great fall in the West. But unlike all the King’s horses and all the King’s men who couldn’t put Humpty Dumpty back together again, the Dow Jones average always mends itself. So the question is not “if” there will be another crash, nor “when” will it crash but rather, do you have the discipline to be a successful long-term investor? And if you have the right investment advice, it’s easy.
At some point, the Dow Industrials will crash by 30 percent or more, and the market will have numerous episodic corrections, but all those thunder bolts and volatile jolts are basically short-term changes and just squiggles on a long-term chart. Think of viewing the state of Wyoming while flying 100 feet above the Laramie, Big Horn and Rocky Mountain ranges. Those ranges look like huge, scary, dangerous peaks and valleys. However, if you fly 1,000 miles above those mountains, the terrain appears flat and peaceful as a flapjack. And so it is with the Dow Jones average. However, looking at a five-year chart, the volatility of the averages is very evident; the Dow has been up and down like a drunk monkey. It’s much less evident with a 25-year chart, and is actually a smooth, slowly rising incline of about 9 percent on a 50-year chart.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at Visit Creators Syndicate website at
© 2014 Creators Syndicate Inc.


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