Recession Worries

The DJIA has lost one-quarter of its value over the last two years (2000-2002). People on pensions based on mutual funds and equities are getting squeezed. What triggers have we created that will contribute to a downward spiral? Should we be worried? How will we cope?

Note that people have said over and over and over again that if you are going to need the money in the next five years at the earliest, your money should not be in equities.

Is there a RecessionCopingPattern? that we should apply? (Okay, I put that in to be relevant).

Well, one "trigger" that didn't exist 70 years ago was mortgage backed securities. Fannie Mae and their ilk. Should real estate values tank while pensioners simultaneously default on their mortgages, the holders of Fannie Mae securities will get hosed. This could then drive the market down further.

One rule of thumb I've heard is to keep a percentage equal to your age in lower-gain, lower-risk, securities, such as bonds. Yield is lower, but there's less risk. When you're 30, you can assume more risk, you have 30 years to make it back. When you're 60, you're crazy to keep 80% of your nest egg in high-risk securities. After all, we can't all work at Wal-Mart.

That's true. Some of us will have to work at McDonalds.

The DJIA has lost one-quarter of its value over the last two years

Perhaps the reason is that the DJIA was over-inflated by 25% leading up to those two years.

Actually to lose 25% now it would have to have been over-valued by 33%.

What is a ReasonableStockValuation? of Microsoft? Enron? General Electric? Ford?

There are many measures (such as PriceToEarnings? etc) that indicate that shares are still overvalued. Back in the boom of 1999 people who suggested this were quickly shown the door, as these were outdated ways of looking at stock. In 2002? Perhaps they still have some value after all.