Is it time to buy?
During the past decade's long bull market, stock-hungry small investors bought shares by the truckload, while naysaying market pundits ate crow. But suddenly, the naysayers are having their day. Technology stocks have been crushed. Large-company shares are also off sharply.
So should you buy? I believe most investors should.
Two weeks ago, when tech stocks were first crumbling, this column advised against buying the dip. But that was when the Nasdaq Composite Index was at 4223.68. Since then, the rout has spread and the damage increased, with the Nasdaq Friday off 355.49 to 3321.29, down another 21 percent from that two-week-ago mark. Sure, stocks may fall further still. But they are clearly a lot cheaper than they were.
"What we've seen this year is huge shifts from one market sector to another, so you want to buy across sectors to make sure you participate in the rebound," says Minneapolis financial planner Ross Levin. He recommends buying broad-based funds such as Vanguard LifeStrategy Growth Fund, Masters' Select Equity Fund and T. Rowe Spectrum Growth Fund.
What if you wanted to bet just on the Nasdaq? Levin suggests buying Nasdaq-100 Index Tracking Stock, which trades on the American Stock Exchange under the symbol QQQ. "That's an interesting buy," Levin says. "You'll own some good companies." But he says it's not an investment for the faint of heart.
Even as you buy, keep your expectations in check. In the past, buying on dips has meant almost instant gratification, as the market came roaring back. Maybe we will once again get this sort of rally. But don't count on it.
"Buying on the dip in Japan in the 1980s worked wonderfully," notes William Reichenstein, an investments professor at Baylor University. "But in 1990 it dipped a third, paused and then continued to decline. Buying on the dip doesn't always work. You can't predict short-term market moves."
That is why those with short-time horizons shouldn't own stocks. If you have money that you will need in the next few years, it should be out of stocks and parked in more conservative investments.
Those with longer time horizons, however, should continue to hold stocks. And yes, these folks should buy, especially if they have been sitting on the sidelines waiting to get into the market or they have new savings they want to add to their portfolio. Why? Forget the next few months and instead bank on long-term fundamentals.
Stocks are a great long-term investment, and a tumbling market offers a chance to pick up shares at cheaper prices. If you diversify across a host of different stocks and stock-market sectors and keep a tight lid on investment costs, you will make decent money over the next decade, thanks to rising corporate profits.
It is these economic fundamentals that you should focus on. If you take the stocks in the Standard & Poor's 500-stock index, which closed Friday at 1356.56, and weight their earnings to reflect their importance in the index, they together had index-adjusted operating earnings of $51.68 in 1999, according to Standard & Poor's, a unit of McGraw-Hill Cos. Operating earnings measure corporate profits, less certain nonrecurring charges.
For this year, Standard & Poor's analysts are looking for index operating earnings of $58.24, a rise of 13 percent. For next year, the analysts are forecasting $65.58, another 13 percent increase. That means the S&P 500 is trading at 26 times 1999's earnings, 23 times this year's expected results and 21 times next year's earnings.
Thanks to this rising profitability, stocks will become increasingly cheap, even if they stay stuck at current levels. Those cheaper valuations will eventually catch the attention of investors, who will then drive share prices back up.
"Previously, people would see a dip of 5 percent or 10 percent and they'd say, 'Let's get in there,' " notes Arnold Kaufman, editor of Standard & Poor's Outlook, a weekly newsletter. "But recently, that hasn't worked well. Buying on the dip is a good strategy. But sometimes, the dip extends more deeply than you expect, so you may have to go through a long period when you're underwater. Over the long haul, though, it should work out well."
You don't find that comforting? At times like this, investors don't think about how far stocks have fallen. Instead, they fret about how much worse it could get.
Clearly, stocks could decline even more. And if they do, today's buyers would have been better off waiting. But our hesitancy isn't really about money. It is an issue of regret. We hate the idea of buying stocks, only to see share prices fall further. We will kick ourselves for being so impetuous.
But the fact is, if you are regularly adding $200 or $300 a month to your stock portfolio, the longer the suffering goes on, the more time you will have to pick up shares at cheap prices. If you buy today and stock prices fall tomorrow, you should cheer, not weep.
So go ahead, buy some more stock. And if the market falls further, buy on that dip as well. Eventually, you will get your reward.
Via Associated Press