Stocks plunged last week. About three years of gains have now been wiped out from the volatile Nasdaq as well as the S&P index of 500 leading stocks. Business profits still look lousy, unemployment jumped to 4.9 percent (up from 4.5 percent before), confidence swooned and many families seem inclined to save their tax refunds rather than spend them (good choice, in my opinion).
On the other hand, the money gods haven’t suddenly sprayed American business with a monster can of Raid. The leading economic indicators have risen four months in a row. Productivity still looks good. Energy prices have fallen, inflation hangs low, interest rates will probably drop some more and the tech revolution is changing the way the entire world does business. Companies will keep spending money on innovative new equipment because they must. And it’s costing them less than it might have a year ago.
No one can say exactly when business will turn around. But profits are going to look a whole lot better next year compared with the wipeouts of 2001. Whether the economy sees its worst in October or March, the base is being laid for the next bull market in stocks.
Money has been running out of stock-owning mutual funds–a sure sign of investor remorse. But there’s also a lot of cash around, ready to be reinvested. Although I, too, have looked into my mirror and said, “I don’t know,” I do believe that stock prices revert to some sort of long-term mean. Thrilling years are apt to be followed by crummy ones. But even with mediocre returns, stocks–as a class–generally outperform bonds and cash, long term. The smaller stocks in Value Line’s 1,700-stock index actually did OK so far this year, while the big stocks died.
It’s in poor markets that you really have to ask yourself what kind of investor you are. For example:
- Would you rather be early or late? Typically, stock prices start to rise about three to six months before the economy does, according to analyst Steve Leuthold of the Leuthold Group in Minneapolis. But there are plenty of false starts. The 20 percent jump in prices in April was born of a hope that the tone of business might firm this fall. Now it appears that the market is restarting the clock.
When you buy early, you risk sharing the pounding that stocks took last week. But when sentiment changes, prices could rise by 30 percent in a matter of days–too fast for the skeptics to re-evaluate and buy.
If you aren’t temperamentally suited for living through scary drops, leave that first leg of the next bull market to wilder souls. Wait until profits start to rise, and take the market gains that continue after that.
- Do you plunge all at once, or can you take your time? When you truly know, in your soul, that stocks aren’t predictable, you’ll spread your purchases (or sales) over time. For example, say you have some scaredy-cat cash hanging out in a money-market fund. You might divide it into 10 equal parts and invest a portion during each of the next 10 months, says Wesley McCain, head of Towneley Capital Management in New York. That gives you the average price of whatever the year will bring.
Programs like these aren’t for buying individual stocks. They’re for allocating assets into broadly based mutual funds. If–say–you’re half in stocks and half in bonds, that’s how you’d allocate your investment every month.
People in 401(k)s average into the markets automatically, by investing a portion of their salary every pay period. Keep it up, even if your account has been losing money. In fact, invest more, to make up for what the markets took away.
- Would you rather be rich or cool? For half a decade, the cool bought individual stocks. The coolest paid $80 for stocks that fell to $15. If they bought mutual funds, they went for techs and telecoms.
Study after study shows that most stockpickers–amateur or professional–don’t beat the market over time. Not that you’d notice from reading much of the personal-finance press. When James Cramer, cofounder of the TheStreet.com, dissed the tech-heavy Janus Twenty Fund in March, Janus pulled a $100,000 ad campaign off his financially struggling Web site. You can’t make a living on Wall Street by telling the public which investments don’t work.
Diversified mutual funds drop, too, when the market does. But the general market comes back, while some stocks never do. To hang on to your reputation for cool, consider this: buy Vanguard’s Total Stock Market Index Fund with your serious money and don’t tell your friends. Because Total Market is 80 percent invested in the S&P, you might add an index fund invested in smaller stocks. Keep that a secret, too. Then be sure to own the latest in software or bio-tech companies that you can brag about a lot!
Can you conceive that other countries actually matter? In the 1990s, U.S. triumphalism spread to stocks. Younger investors have never known a time when internationals shone. But in the late 1980s the EAFE index (Europe, Australia, Far East) beat the tar out of the S&P 500–and at some point it will again. Conventional wisdom today says that global markets move in lockstep, so you might as well shop at home. But, in fact, growth in different countries still rises and falls at different times and different rates, says Kurt Umbarger, portfolio specialist at T. Rowe Price International. Professionals like to keep 10 to 20 percent of their assets abroad.
Can a stock-obsessed generation imagine buying bonds? If stocks struggle, the 6 percent yields on bond funds today will look pretty good. The high-yield funds pay 9 percent, and they’re no riskier than stocks. I’ll predict this: bonds for boomers lie just ahead.
