(Host) Commentator Timothy McQuiston offers advice and insight into the turbulent stock market.
(McQuiston) Stocks are over-valued. That’s because stock prices across the board, regardless of industry, were the beneficiaries of stock inflation starting in the late 1980s and ending just 18 months ago. And I have the IRA statement to prove it. Two months ago, I lost twice as much on my retirement account as I put into it. And this was after more than a year of lousy performance. Last month, I made a few bucks, emphasis on the ‘few.’
The Dow tracks 30 key businesses. You’ve got your IBMs, your Coca-Colas and your Wal-Marts. But the Dow Jones Average, although the most famous of the three major stock indicators, is generally scorned as the least representative gauge of American publicly traded companies. Standard & Poors, known as the S&P, uses 500 companies. The tech-heavy NASDAQ exchange uses an average of all its members to produce an indicator.
And the averages aren’t just a simple cumulative stock price divided by the number of companies. The Dow takes into account, for instance, stock splits by the companies over the years. The S&P also figures in how many shares have been issued. The Dow is the frumpy granddad, the S&P is the smartly dressed know-it-all, and the Nasdaq is the cool kid in school.
Stock inflation to this generation is like what grade inflation was to Baby Boomers. It’s not predicated on anything real. College students were given higher grades because bad grades could get you sent to Vietnam. Professors didn’t want that hanging over their heads.
Stock value has thrived on tax laws that allowed for 401Ks and IRAs, and created hundreds of thousands of Average Joe investors. They contributed to mutual funds from their weekly pay envelopes. With such increased demand, prices naturally went up. Then they spiked, as the high-tech and then dot-com booms sent everyone scurrying to buy into any new gizmo stock they could get their hands on. Traditional stock valuation was based on revenues, assets, profits. But in the new economy, as hot dog vendors on Wall Street would say, fagetaboutit.
Now, of course, there is a new sobering. The roller-coaster that stocks are currently on is typically reflective of a market that has bottomed out. The questions is, when is that ride going to end? No one knows.
Remember the ethos, buy low and sell high. Most of us have bought high. So, if you’re not about to retire right now, or don’t have to use your mutual funds to send a kid to college don’t sell. And you can’t afford to ignore your retirement.
I just keep investing the same amount in my retirement account with the hope that in 20 years things will be a lot better than they are right now. Or make that 30 years.
This is Timothy McQuiston.
Timothy McQuiston is editor of Vermont Business Magazine.