Cramer and his "Too little too late" advice

On October 6, CNBC "stock market analyst" Jim Cramer was appearing on NBC's Today Show.

The Dow had been rapidly dropping, had passed 10,000 and was continuing downward. It was now about 33% off it's high of about 14,000 which had been set a year earlier.

Cramer, ever the stock guru, offered this investment advice to the viewers of the show: "Whatever you may need for the next five years, please take it out of the stock market. Right now. This week. I do not believe that you should risk those assets in the stock market." Cramer said that his advice was prompted by the concern that "We could have as much as a 20% decline in the stock market." He went on to say "If you can withstand this, just ride it out."
(Update October 23: The Dow is down 16.21% since October 6; it seems Jim Cramer may have been too optimistic!)

Here is the interview: http://www.youtube.com/watch?v=uoSLVCEGKko

That was good advice. However, it was already a bit too late to offer it. It is recommended by most financial consultants that one shoud NEVER put money that is needed within 5 years into the stock market. And, if one is nearing or in retirement, that money shouldn't be put at risk. Money invested in the market is at risk.

So here we are. Thanks Jim Cramer. Any retirees watching your show "Mad Money" and playing the game, day after day, could possible have lost 1/3 to 1/2 of their retirement assets, before pulling the plug on your advice and then contributing to the "panic".

I suppose I could be criticized for lambasting Cramer. But I think my anger toward him, and others like him, is justified. No, I don't follow his advice. I do watch his show occasionally while using the tread mill at the gym. It strikes me that his show could be called "Having Fun and the Lure of Making Money through Trading". However, there is risk in the stock market and many people who had been lulled into complacency by the likes of Cramer have suddenly re-awoken to that risk. And when they did, they yanked all of their money out of stock, bonds, even gold!

The truth is, the only people guaranteed to make money in the stock market are stock brokers, who make a commission on every sale, and media types such as Cramer, who get paid very well to entice the lemmings to the cliff. There are those who say all of this is for the good of the "service economy".

Those of us who are "invested" are taking risks. True, over the long term, there is ample evidence that it is possible to make money buying quality stocks. Cramer is now advocating just that. He said yesterday (October 21) on his program that "It's still possible to make money in stocks... It's always been possible. But you have to know what to look for, particularly in this market!... As much as this market has made us lose some of our faith in the ability of stocks to go higher... As much as this market has pummeled us beyond all recognition... it's also given us a new touchstone... it has given us... a new faith in dividends..."

The title of that program, as per his website, was:
"Stick with the Dividend Plays for Capital Preservation..."
http://www.madmoneyrecap.com/index.html

So now Cramer says, take what is left of your retirement portfolio and put it into dividend paying stocks! Of course, there are stocks out there that pay dividends, healthy dividends, but won't survive the economic downturn. Oh, and by the way, if you get a healthy 5% growth on your remaining investments, and assuming you lost 40% in the past year, it could take 10 years using this investing technique to get back to where you were in September 2007! If you do very well and can get 10% growth on your ravaged portfolio, it will only take 6 years to recover. Which is why having a stock market time horizon of less than 5 to 10 years is dangerous to your financial health. It is I suppose why Jim Cramer told people to pull their money. However, there is frequently a sharp upswing in the market at the conclusion of a bear market. For example, at the conclusion of the bear markets of 1974 and 1982, which were very severe bear markets, the stock market returned at least 60% in the next 9 months. I have read that this also happened after the 1932 stock market bottom which was the Great Depression.


See this website: Bear Market Recoveries Since 1950

In the above, you will note that it took 10 years for the S&P 500 to fully recover. This was considered a worst case scenario. The important thing is to realize that these long, anemic or sideways markets do and did happen. Can you wait 10 years?

In fairness to Cramer, there is money to be made in trading stocks, and a lot of people have fun doing some trading. I suppose it's a healthy pastime, as long as one doesn't jeopardize their retirement funds. That means, probably no more than about 5% of one's worth should ever be invested for trading on a show such as Cramer's. If you "win" fine, and if you lose it all, you haven't lost much. But it is easy to get cocky and it is easy to get caught up in the excitement. People do it each and every day in casinos all across the USA.

You are probably wondering if I am invested in the stock market. The answer is yes. I do have my reasons. If you want to know what they are, then go to this site: http://letmethinkaboutthis.blogspot.com/2008/10/check-in-in-20-years.html