So the Dow’s dipped below 7000 for the first time since 1997. And coming off NPR this morning is the oft cited advice of not selling your stock because when the market’s this far down, selling now is equivilant to “buy high, sell low” which is exactly the opposite of the market strategy you should employ ([sub]option and short trading notwithstanding[/sub])
For the record, I agree with this advice. But I see three key aspects of it that no one in these multitude of news reports ever addresses:
“Don’t sell now” is exactly what the experts were claiming when the market hit 10,000. And again when it hit around 8,500. There were tons of threads on this very board with the question “should I buy now?” and the answer tended to be “yes! Now is the perfect time to buy because of how low it’s dipped.” But I’ll bet the people who got out at 10,000 are feeling a lot more secure now that the stock market is currently at…lemmie check…6,819.53.
Lots of people are selling. Lots and lots and lots. That’s why it’s falling. And yeah, there’s some percentage of people who don’t know what they’re doing and just panic and pull stocks as it falls, but they’re not all idiots. They’re not all lemmings. There’s got to be a reason people are selling now and perhaps it’s best if we identify why that is rather than just say “now is the perfect time to buy!”
Here’s the big one. As I said above, the Dow was last was below 7000 in 1997. TWELVE YEARS AGO. So someone could have gotten out of college in 1996, socked away 5% of their income for more than a decade, prudently invested for the long term, and today have absolutely zero to show for their dilligence. They’ve done exactly what every expert has said is sound financial planning and they’re back where they started. Maybe what everyone says is sound financial strategy really isn’t. Maybe buying from the stock market now isn’t as wonderous a proposition as one might think, even though it’s so cheap now it’s practically a steal.
Well it IS a sound strategy, but only if you pay attention to what the market is doing and buy and sell accordingly. An even better course of action is to pay attention to the market, the news, and the economy. When things started looking shakier and shakier I dumped most of what I owned. I’ll buy back in when I’m convinced that the economy is actually recovering.
The problem that a lot of people who invest in the stock market have is the idea that it’s like a bank. That is, they buy a stock and expect it to grow and grow and offer them a great return when they sell it upon retirement. That’s obviously not the case, but you’d be amazed how often this is ignored or overlooked.
If you want your 3-5% yearly buy a CD.
You can do better than 3-5% in the market, but only if you’re careful, pay attention, and are ready to move when the time is right.
Pet peeve on this subject - I’ve heard several friends with stock funded IRAs complain that they’ve been “wiped out” by the falling market. No friends, you haven’t. You still own stock, and the companies you own stock in will probably survive, and when the economy begins to grow again your stock will return to its original value, and will probably go higher.
Man my laziness saved me a ton of money. When I got a new job almost two years ago I rolled my 401k into an IRA and put it initially into a money market fund that only got something like 0.5% return. My intention was to as soon as I got some time to allocate the funds to various index funds and growth funds, once I had a chance to determine what was best. Well days turned into weeks, weeks into months, and before I knew it the market was collapsing and my money was still earning nominal interest, but more importantly not losing value.
I wish I could say I was smart, but I’m not. It was actually dumb luck.
I wish people would keep this in mind whenever they start demanding that employees should be automatically enrolled in their company’s 401k program, and then given the option of opting out. The theory is that this sort of friendly paternalism will help benefit employees, because most people simply fail to enroll due to laziness. Somehow they forget that the stock market can go down as well as up, and people at certain times can benefit from not being enrolled.
By the way, whatever happened to those guys who wrote Dow 36,000? Haven’t heard much from them lately.
I’m a buy and hold kind of guy. The market is down, but I will continue to buy and hold. Right now I’m being mauled, but when times are good it goes better.
Same with a house value. In both stocks and houses, you haven’t lost money unless you are trying to sell. You still have the house, you still have the stock
I’m about 20 years from retirement. The means I’m at least 20 years from actually selling anything in my retirement funds. Unless I feel that a company has a chance to go under, I’m not worrying at all. Some time between now and the 2020s, stock prices will go up.
They own stock. That’s not “zero”. Assuming they completed college in their mid 20s, they still have 30 years until retirement. What you can sell stock for today does not matter when you won’t need the money for 30 years.
Technically speaking this is not correct. This investor would have earned dividends throughout the last twelve years, so they’d would have some net earnings. On the other hand, when adjusted for inflation, they’d probably have a net loss.
More importantly, I know of no expert who advises buying only stocks. Most will advice you to split your investments between stocks and bonds, with perhaps a small amount in money market (to protect against total disasters like this one) and another small amount in precious metals (to protect against inflation). Don’t think that I’m defending mainstream economists, because I’m not, but they’ve committed enough real mistakes that we have no need to exaggerate them.
Actually now seems like a great time to buy if you buy diverse. Either the economy will recover and you’ll make some great profit, it’ll stay as it is now and you’ll make modest profit, or it’ll crash completely and you’re skull fucked anyway.
Most advisors advise against bailing out of stocks because, in the long run, they return higher yields than anything else. If you look at returns over 75 or 100 or 150 years, the premium for stocks over bonds or gold or money market accounts is enormous.
The problem, which people are wont to forget during boom times, is that the long run can be very long indeed. The DJIA was lower in 1982 than in 1965, and lower in 1953 than in 1929.
The flip side is that returns during the boom years (1982-1999, for example) are spectacular. And you don’t know in advance when those boom years are going to be. There was a temporary crash in 1987, and if you would bailed after that, you missed some of the best years in human history.
At any given time, you don’t know. Anyone convinced stocks can’t possibly fall further needs to remember that 89% drop between 1929 and 1932. Anyone convinced of the opposite needs to remember that people who bought in 1932 did very, very well.
Okay, substitute S&P 500 for Dow, which is probably more like what they were told to invest in. The S&P Index includes reinvested dividends and was 797 exactly 12 years ago and closed at 696 today, a 12.5% decline.
They would have done better putting the money under the mattress, even if there was a very slow worm eating away at the pile of money for the last 12 years.
The broader the index, the worse the performance has been.
Sounds like the typical 529 College Plan. The problem is that when started the kid was a little tyke and the future looked good. Invest now, don’t pay so much later. Now the kid actually wants to go to college and the money hasn’t appreciated at all. Aw, shit!
No, it doesn’t. The S&P 500 is a price index, just like the Dow.
There’s an alternate version called S&P 500 TR, which does include reinvested dividends, which is currently at 1,133. However their web site only carries it as far back as 2005, so I have no idea what it was in 1997.
