Charles Schwab Warning…

[trex]

I usually just read the commentary but just saw this in my inbox and decided some of you might find it interesting. The bottom line: Charles Schwab brokerage is predicting a hard landing that will hammer stocks too, and advising clients to move money to cash. Nothing you don´t already know, but lots of numbers, etc. Link below.

http://www.schwabinsights.com/2006_09/mktoutlook.html

[Chrispy]

Clarification – she recommends moving 5% of your portfolio into cash. From the article:

“In Schwab parlance, “slightly” means five percentage points of your total portfolio value. So we are not recommending clients completely replace their stocks with cash, just that they make a minor adjustment.”

[JES]

But then Schwab could never recommend moving 100% into cash could they? 5% is nice conservative number, similar to the NAR forecasts that say prices will go down a little bit only to rise again. I suppose I am truly a skeptic, but how can we trust their advice when they have a vested interest in maintaining our faith in stocks?

[Carlsbadliving]

And what good is 5% going to do if all your stocks get wiped out?

[no_such_reality]

I got the same note, and immediately concluded it was more meaningless babble to churn accounts.

One look at the first graph shows two main points.
1. It’s a lousy ten year period.
2. 1994-1995 on the chart shows the exact opposite of their conclusion. In fact, 1994-1995 shows the housing market index collapsing 50% to be followed by the S&P rising 50%. They forecast the same collapse in 2006 with big ? mark to ask what’ll happen.

The rest are equally babble-speak.

Argh.

[JES]

The stock market has been doing well for some time, the economy has been on steroids for a number of years and as we all know, housing has gone crazy since around 2001. There are very good analyticaly based arguments that all three are headed down, and common sense tells me that in these matters, when things have been humming for a long time they will eventually correct. All three are primed for a correction IMO.

When the economic news just can’t get any worse, home prices have crashed and people are still not buying homes, that will be the time to buy again. For money making trends, follow the initial adopters early and ride the wave up as the masses adopt. But the key is that you should hang tight through the final phase of overzealous buying, but immediatley turn contrarian before the herd decides to do the same. EG: I sold my home early this year at a time when most people still had faith that prices would slowely rise or level. In only a few months, the herd has now changed its psychology and it is too late to sell!

OK…so I am patting myself on the back. My point is that common sense alone tells us alot.

[lindismith]

Is there anyone on this board who has not moved to cash?

When I spoke to my financial advisor about it, he put the pressure on! He has been giving me a really hard time about getting out of my mutual funds.

I would love to hear the argument for staying in or getting out of my mutual funds.

[powayseller]

I tried to help my friend this spring, and gave her all the data from piggington, The Big Picture, Calculated Risk, Yamamoto Forecast, about the housing slowdown, recession, and lower stock market. She said she would study it, but apparently I did not present a convincing case. This week she told me she is still in the stock market, because “it is doing very well”. She lost 1/2 her money in the tech stock crash, but this time she thinks it is safe to be in the market. For the record, I think the stock market will bust almost as bad as in 2000.

It’s useless to even try to convince people to move to cash, because Wall Street has done a great job convincing people that stocks are safe, risk-free and only o up in the long term. Financial advisors who are commission-paid, will probably not tell you to go into cash.

[JES]

They really have done a good job convincing us that cash is bad, to the point that I have an adverse reaction just considering it! I do see the wisdom in eventually putting money into index funds, and almost convinced myself to go for some large cap growth stocks since they have seen little gains the past decade and pay good dividends. But I am convinced that those investments will be cheaper a year from now so I am not buying.

Powayseller, have you read the book called ‘The Only Guide to a Winning Investment Strategy You’ll Ever Need’ by Larry Swedroe? I just started reading it this week and since you have studied everything I’m think you might have seen this. I’m not trying to plug the book, but a buddy of mine works at an asset management firm and sent it to me. He used to work for a brokerage like Merrill Lynch, but he is now convinced that the strategy in this book is solid and that his previous job was a joke.

[powayseller]

JES, I have not read the book. Can you summarize it, and give us your own opinion of it? I’d be interested in what you think about it.

[MH]

Agree…  With MMF's paying ~5%, what's the lure of stocks?  Seems to me that even the rosiest bull has got to admit that anything over 8% is unlikely – so why assume the extra risk for the fleeting chance of an extra 3% return?

 I'm not only ENTIRELY out of equities but have bought MYY (short sells mid-caps) and bought a few cheap puts on QQQQ (need pretty big drop to make any $$$) and some more realistic puts on DJX – all with a Dec-Jan expiration.

 

[PD]

My savings account at USAA paid 6.24% last month. 🙂
I am getting an extra percent for signing up (the program ended 9/15) that will last for another four months.

[LookoutBelow]

Charles Schwab wants you to dump stocks in favor of cash about as much as a dentist wants tooth decay to be eradicated.

They are covering their asses with that forecast.  I would be surprised if there are many investors with Schwab that have over a million in assets invested with them. Its a discount brokerage. So to say "Move 5% to cash" and let the other stuff ride on in the market is ridiculous.  

Lets say I have 1 million total in my portfolio, I move 5% (50 grand) to cash, the rest 950K in World Com, K mart, Enron stocks (you know..stable investments like THOSE were)….they are all shakey in my opinion its totally over valued, but the market tanks like she describes could happen in that treatise, ……NOW what ? 

So I got 50G's left of my former 1 million in total portfolio of capital investment ? What the hell is that ? Who could possibly feel good about losing 950K (or there abouts) on foolish pumped and dumped stocks?

So you have 50 K left ? So what ? How long could you live on that ? 

Like I said before, HOW MANY HUGE investors are trading with Schwab to give that kind of advice any meaning ? Very few I would imagine. So it gets filed in the round file for quality advice. Good numbers, good research, bad advice. Its takes a lot of money to MAKE money in the long run of stock markets. Ask Futures traders how hard and risky it is in reality.

 

 

[JES]

PD – That 6.24% sure is great isn’t it! I just signed up last month and have 5 months left at that rate.

Powayseller – I’m only on page 70 of that book, but will post something when I am done. So far, he has made a convincing case that managed mutual funds are not the way to go, and that index funds are better.

[Author]

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