“I may just quit my job at the plant to become a full-time stock market guy.” – Homer Simpson

When Richard Russell launched Richard Russell’s Dow Theory Letters in 1958, he said that what then looked like the beginning of a bear market was merely a bull market correction. “Stay in stocks,” he urged his readers — and he was right. He was right too in January 1975, when he predicted that the bear market had bottomed. He was right again in September 1999, when he warned that a new bear cycle had begun.

According to Mark Hulbert, editor of the Hulbert Financial Digest, an investor who followed Russell’s “buy” and “sell” signals from June 1980 through the end of 2001 averaged profits of 11.9% a year. “On a risk-adjusted basis, Russell’s market timing beat a buy-and-hold strategy,” Hulbert said.

In an interview with Bloomberg’s Personal Finance, Russell predicted that the bear market will last “about six years or roughly one-third as long as the bull market that preceded it, bottoming in 2005 or 2006.”

He compares the current rally to what happened in 1970, when the Dow climbed to 1,000 before plunging to 631. Back then, investors rushed back into the market when it rallied — but the move up turned out to be a bear market bear trap. The second leg down followed (the crash of 73-74), and when it was over the Dow stood at 577.

Which is to say that Russell is expecting another rally of this sort — maybe one that continues even further — that will “turn the crowd bullish” again, only to be followed by a second, deeper crash that will make a lot of investors a lot poorer.

To invest successfully at a time like this, Russell argues, you need to be a sophisticated investor. “The average person isn’t going to make money.”

Russell himself is not trying to play the rallies. He’s advising his readers to stay out of the market for the next few years and to put their money in very high-grade munis and gold.

I don’t have any money in gold myself, but I’m pretty heavily into munis. As you know, I got out of stocks — almost entirely out of stocks — two years ago (in 2000). Recently, I discovered that I had some annuity money still sitting in conservative stocks (my assistant failed to file the right forms) and was tempted — but only for about five minutes — to leave it there and enjoy the current uptrend. I resisted the temptation and am happy I did.

In fact, I persuaded my mother-in-law to get her retirement funds out of stocks and into munis and high-quality corporate bonds (to give her a good ROI, since she has no current need for income). I don’t like messing with my mother-in-law — so that may give you an indication of how I feel about this.

That said, I’m all in favor of keeping a portion of your money in stocks if you have (a) a good reason to buy stocks, (b) a system of buying and selling that makes sense, and (c) the emotional discipline to stick with your system. Since I lack such discipline, I’m 100% out of stocks right now and happy to be averaging 5% on my fixed-income investments and about twice that much on real estate.

Russell says that his signal for the bottom of the market is when dividends are yielding 5% to 6%. “As the bear market moves along, the pressure to pay dividends will increase. And I think yields of 6% are what will be needed to make big investors willing to take the risk and get back in.”

[Ed. Note.  Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.

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