Ask MAX: Should I sell based on Cramer's warning?

November 3, 2005

Dear MAX,

I'm 25 and live in Brooklyn. Jim Cramer said the market is going to crash with the economic news of the last three weeks. Should I sell all my stock funds and buy bonds?

Brooklyn, NY

Dear Yehuda,

Take your hands off your keyboard and step away from your E*TRADE account. Jim Cramer is probably wrong, and is definitely not the guy to go to for sound investing advice.

We love watching Cramer's new show as much as the next guy. We love his sixteen-cups-of-coffee delivery, his aggressive-as-a-rabid-Pit Bull stock picks, even the dopey sound effects. 'Mad Money' is unquestionably the liveliest show on the toned-down, post-Enron, post-Nasdaq 5000 CNBC.

But while Cramer is a bright guy with a lot of real world investment experience, his show is first and foremost entertainment. We wouldn't base our investment decisions on Cramer's television rants any more than we would on the advice Uncle Earle gives us at Thanksgiving dinner. Okay, Cramer is probably a safer bet than Uncle Earle, but you should be wary of all famous (and oft-wrong) market prognosticators.

While Cramer's dire warning of things to come may make you want to log on and start selling, his track record on his new show proves that he's not exactly the Amazing Kreskin. According to, a website that tracks Cramer's Mad Money stock picks, he's recommended 290 stocks since late July 2005. 116 (40%) of those stocks have gone up since his recommendation while 171 (60%) have gone down. The Tampa Bay Devil Rays had a better winning percentage than that last season, and they finished dead last in the AL East.

Neither Cramer nor anyone else can tell you with anything approaching certainty where the market is headed in the short term, and anyone who tells you they can is either lying or crazy. Selling all your stocks in favor of bonds would certainly be the right move if Cramer is right, but what if he's not?

Investing is all about playing percentages and hedging your bets. Sure, the market is more likely to perform poorly if valuations are at historic highs, and the market should do well if valuations are low. Neither event is guaranteed or even mildly predicable over just a few months. When the forecasting methodologies we use to manage our private accounts or the MAXadvisor Newsletter indicate we should focus on one fund category over another, we know there is a reasonable chance things won't proceed as expected. In fact, when we make changes to our portfolios we do so with the full knowledge that our forecast might be dead wrong. We might think there is an 80% chance that international stocks are heading for trouble, but you have to prepare for the 20% chance that the market will continue to rise.

Our MAXadvisor Newsletter's Aggressive Growth model portfolio is currently 80% in stock funds, 20% in bond funds. If we felt stock funds in general were due for lackluster returns, we wouldn't sell all of our stock fund positions and allocate the entire portfolio to bonds or cash; the most we'd do is reduce our stock position by 10% to 15% and choose lower risk stock funds for the stock allocation. This kind of re-allocation would give us adequate protection from the potential market drop (given the higher risk profile of the portfolio) but keep us aggressive enough if the market didn't fall.

There is almost no situation where a twenty-five year old investor like yourself shouldn't have a fairly significant portion of their portfolio in stocks, unless you were planning to make a major purchase, and hence would have a lower risk tolerance as you would need your portfolio too soon to take full market risk. Even the MAXadvisor Newsletter's Safety portfolio (the most risk-averse portfolio in our lineup, appropriate for the most nervous or those living off retirement income) has a 25% allocation to stock funds. The reason for that is because sometimes holding some of your money in riskier positions can reduce the overall risk of your portfolio by increasing diversification. Our Safety portfolio's stock allocation makes the overall portfolio less volatile if the stock market moves in a different direction than the bond market. Over the longer term, stocks offer some degree of insurance against a killer to an all bond portfolio: inflation.

Where do we think the market is heading? While we aren't terribly bullish about the short term, we certainly aren't predicting a major market collapse. Don't forget bonds - unlike in 2000 - aren't underpriced compared to stocks and are automatically worthy of a huge allocation every time you get jittery about stocks. Yes, there is a chance that Cramer is right and stock prices are about to fall over a cliff. There's also a chance that the market is about to take off like a rocket (and if it does, watch Cramer change his tune in a hurry). We're aware of both of these possibilities and have built our model portfolios to withstand the drops and take advantage of the launches. You should too.

Thanks for the question.


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Cramer was right.
Anonymous — POSTED February 28th, 2007 3:37AM

Hey Max... A little salt with your foot?? Cramer was dead on. Hope she sold. DJIA -416.02!!!!
A blind man could see that comming, being over inflated at 12G's +.