Stocks: Recession Bites

For some reason, I started paying more attention than usual to the stock market today. The closing prices are sobering: Sears Holdings and Goldman Sachs, down 10% to new lows. Google below $300. Citigroup below $10. Morgan Stanley down 15%. Portfolio cover star American Apparel down 35%. Sure, they'll all probably be up tomorrow. But this is what a bear market looks like: lower lows, lower highs.

What's an investor to do in such a market? Holding on for dear life seems like a recipe for wealth destruction, while selling at the lows seems even more stupid. And buying, of course, is only for the brave.

I think a lot of people might be reconsidering why they're investors in the first place. Was the extra money they hoped to make in capital gains really worth the kind of pain they're going through now? The financial services industry has spent billions of dollars bombarding us with the message that we should invest our money rather than just keep it in a CD at the bank, but those who refused to listen can be forgiven for feeling rather smug right now, with the S&P 500 down more than 45% from its October 2007 high.

Stock markets are a great way for a society to determine where best to allocate its capital. But once in a while we get a reminder that they're best suited for long-term capital you don't really need. Because when the recession really bites and you lose your job and you're forced to fall back on your nest egg, that's a particularly gruesome time to be forced to liquidate your portfolio.