The Sleeping Point
Reprinted with permission from Crash2 – Surviving the Next Great Depression by Stephen E. Covell
A worried investor asked J. P. Morgan this question in the early days of the Depression: “What should I do about my stocks. I can’t sleep nights.”
Morgan replied: “I’d sell down to the sleeping point.”
Should you liquidate everything and build a bunker in which to store your Krugerrands? Absolutely not. I do not mean for a moment that investors should enter panic mode and sell off every type of investment. What I do suggest is that you start by taking a close look at where your money is invested to see whether a bit of common sense should be applied. Stock brokers have been selling the idea for years that you can just diversify your portfolio and hold on for the long run. With the changes coming this is just not going to work anymore. The “diversify and hold on” strategy is somewhat like buying several houses on the same street in an attempt to spread out risk from flood damage.
For brokers who still try to convince you that holding a diverse portfolio for the long run is a good strategy, ask this simple question: “Would that have been a good strategy in 1928?” It is a good bit of fun to listen to the responses. Some will answer that the market still comes out ahead in the long run. If you read the chapter in this book dealing with Crash 1, you will know the perfect response. You will have learned that it took 25 years for the market to come back to the level it had at the beginning of 1929. Would anyone want to wait 25 years just to break even?