Pretty amazing advice from the Austin Business Journalgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
This is an extremely mainstream publication..was a little surprised at the scenario that was painted... "buy gold"??
April 5, 1999
Y2K: Certain problem with uncertain effects
Allen F. Campbell Special To The Austin Business Journal
Will Y2K cause a "digital recession"? Will it induce a collapse in stock market prices? What should an investor do now? What should an investor do over the next decade?
There is no doubt that the Year 2000 problem will manifest itself in systems around the world and that Y2K has the potential to cause serious disruptions in the production and delivery of goods and services by business, government and other organizations.
There is, however, general uncertainty as to the nature, extent and consequences of the manifestations of the problem. Those uncertainties must be considered in connection with all the other uncertainties that affect the stock market.
No one knows exactly what will happen. Therefore, management of uncertainty is itself an important task.
Market cycle a benchmark
The following is merely one scenario; but it is too important to ignore.
Sometime before Jan. 1, 2000, alarmed by Y2K predictions, investors begin unloading stocks in such quantities as to cause a decline in the stock market.
During 2000, as Y2K disruptions occur, investors realize that the reality of the problem is worse than the market had anticipated. They exert more selling pressure on the market.
Also during 2000, there is a reduction for two quarters of gross product of goods and services. In other words, we have an international recession.
The recession becomes an additional force, in fact the primary force, driving stock prices down.
Sometime in 2000-2001, the Dow Jones Industrial Average reaches its low point in the range of 4000-5000.
For several years after that, the stock market is sloppy, but remains severely depressed due to Y2K "fall-out," such as bankruptcies. Investors continue to avoid the market.
During this time, Y2K "winners" continue to take market share from -- or acquire -- the "losers," and wealth continues to be transferred from the losers to the winners.
Eventually, the restructuring of the world's institutions and economy picks up momentum, investors gradually, though cautiously, re-enter the stock market, and stock market prices start improving.
As the economic recovery proceeds, returns on capital become attractive, confidence returns to the investment community, and a long-running bull market drives the indexes to all-time highs.
What should an investor do?
An investor who is fully invested in stocks faces the following reality:
If the market falls 50 percent, it must double to regain the lost ground;
It normally takes many years, often tens of years, for historic highs to be re-attained after major crashes.
The optimal strategy employs the right assets and manages uncertainty and timing.
There are several types of assets in which investment may be appropriate for Y2K purposes.
Many investors have bought the shares of Y2K tools companies and Y2K service providers.
Such investments are more in the nature of isolated investments - commonly seen as speculative plays - than portfolio strategies.
A few, extremely sophisticated investors are attempting to identify shares of specific companies which they believe will be notably affected, buying stocks of winners and shorting stocks of losers.
This is too treacherous for most investors to attempt.
A third strategy - investing in classes of assets, rather than individual stocks - is best.
For purely defensive purposes, highly secure short-term fixed-income obligations, such as US Treasury Bills, will be a mainstay asset class.
Many indexes are available. For example, you can short the S&P 500 futures contract during the downturn and go long during the up market.
Gold is negatively correlated with the stock market and is an asset class to be considered.
Rare coins will be an interesting asset class for Y2K purposes. Foreign currencies are the other principal asset class that will be affected by Y2K.
Selecting among those asset classes will depend on the investor's objective - defense, a bridge over troubled waters, at one end of the spectrum; profit, at the other end of the spectrum; or some intermediate objective.
The choice depends on the investor's risk-reward calculation and, above all, on the investor's risk tolerance.
It is a common observation, that "timing is everything." It is obvious that an investor should, if possible, buy low and sell high.
Investors, however, have accepted in recent years the idea that in the long run a diversified portfolio of stocks delivers the best results.
That idea has been strengthened by the idea that stock prices are inherently unpredictable - a "random walk" - and that no one can pick the time to buy stocks or the time to sell stocks.
Y2K challenges that conventional wisdom. Y2K lies dead ahead. A good pilot avoids known obstacles. Perhaps the trickiest aspect of Y2K investing is the timing.
As noted, the markets are ruled at all times by many forces, of which Y2K will be only one. Timing decisions must accordingly be made with due attention to the other forces. This is an area where professional money management is highly desirable.
Allen F. Campbell, is chairman of the Dallas-based Y2K Resources Group.
-- Roland (email@example.com), April 05, 1999