With the Dow and S&P 500 more than 40% off their year-ago highs, and with a sense of panic pervasive right now, we asked a panel of Fool analysts what folks should be doing right now with the.
What is the best thing to do with your money (stocks, savings, etc.) during these times?
Robert Brokamp: Ideally, you didn't have money you need in the next five years in the market. If you did, it's time to cut your losses. But that's the only reason to be selling right now. According to Jeremy Siegel's Stocks for the Long Run, stocks beat bonds in approximately 73% of five-year periods since the 1800s. Clearly, it doesn't happen all the time, but I like those odds -- especially if you don't need the money for something closer to 10, 20, or 30 years.
Speaking of the long run, it's important to remember how long that is. We should all plan on living to our 90s, which means even investors in their 60s have a multidecade time frame for at least some of their money.
Tim Hanson: Categorize it. You need to know (1) what you need for the next three months, (2) what you need for the next year, (3) what you need for the next three years, and (4) what you don't need for a good long while.
What goes into No. 1 is your emergency fund. Make sure you have it in a FDIC-insured savings account that you can get at when you need it. For Nos. 2 or 3, get a better yield, but still protect the principal, by buying a CD or TIPS. For No. 4, that's money you should be averaging into the stock market at today's low prices. That money will be volatile going forward, but as I wrote yesterday, it's the best strategy if you can do it.
Andy Cross: We often say our approach at The Motley Fool is "buy to hold," meaning that our research approach is long-term and that we try to find companies we can hold for years. Well, now I think we're in a "save-to-buy" environment. You'll want to make sure you're saving your pennies as we go into a period of true economic uncertainty. That's not to say you need to turn into Ebenezer Scrooge, but do keep in mind how much you're earning and spending. That way, you can judiciously put some of this money to work in high-quality, cheap stocks, and we're starting to see some serious values out there. Berkshire Hathaway (NYSE: BRK-B ) , one of the most stable companies around, is down almost 20% since the beginning of the month. That's incredible. Is the franchise value and long-term earnings power of Berkshire 20% less today than it was on Sept. 30? I doubt it. So save-to-buy is my advice.
Bill Barker: Stick to the plan you had before any of this started happening. And if you didn't have a plan beforehand? Get one -- get the one you should have had all along (I'll explain in a minute), and commit to memory, "I will never spend another day investing (or not investing) my money without a plan."
Money that you'll need to spend in the next year or two for a house, car, in case of losing a job, and so on, that shouldn't have been in the market, shouldn't be in there now. Nothing about that has changed in recent days. It was true when the Dow was at 1,400, and it is equally true today with the Dow visiting any number between 7,500 and 9,000, depending on when this gets published or when you read it.
Money that you're setting aside for retirement, if that retirement is 10 years or more away, I believe, should be fine. If you're closer than 10 years to retirement, hopefully you've been diversifying into bonds, REITs, TIPS, and cash instruments as we or any number of financial advisors have been advising all along. If you aren't diversified into those instruments, start doing so -- regardless of whether you think the market is going to trade at a higher or lower price next week, next month or next year. If you're properly diversified, you'll be sleeping fine.
James Early: If academic research is a guide, individual investors will pull out of stocks near the bottom. And if market history is a guide, this will create a buying opportunity in equities. This long-term chart of the Dow Jones Industrial Average shows that sudden drops tend to be rebounded from reasonably quickly.
But now, more than ever, investors need to consider their risk tolerance, wealth, and time horizon when investing. Beaten-down financials may be great for someone OK with risk, whereas someone needing to play it safer should look at utilities or a maker of cheap consumables, such as Procter & Gamble (NYSE: PG ) , Coca-Cola (NYSE: KO ) , or PepsiCo (NYSE: PEP ) .
In the tech bubble, risk (and its commensurate return potential) was expensive: Investors had to pay for the privilege of investing in risky companies. Now, it's practically being given away. This means that folks selling out of stocks to buy safer investments will pay dearly. They're getting a terrible deal. Those who absolutely need the money soon may need to do that, but for the rest of us, the long-term chart says that we probably want to be in stocks now, not out of them.
For continuing coverage and analysis on all the market turmoil:
- Roundtable: Panic, Sell, or Panic-Sell?
- Panic 2008
- How Bad Will It Get?
- Fool Poll: How Low Will the Dow Go?
Tim, Bill, and Andy own shares of Berkshire Hathaway, as does The Motley Fool. Neither James nor Robert owns shares of any company mentioned. Andy owns shares of Pepsi. Berkshire and Coca-Cola are Motley Fool Inside Value recommendations. Berkshire is also a Stock Advisor selection. Read about the Fool's disclosure policy.