Crisis of Faith: Buy Now or Cash Out?

Have stocks finally hit rock bottom? That's the question I ask myself every time the markets fall through a new low.

I know that stocks haven't been this cheap since 1991. And that going against the grain and buying now -- when the rest of the investing world has abandoned hope -- is precisely how the likes of Warren Buffett and Sir John Templeton built their fortunes.

But for me, that's a tough pill to swallow.

Frankly, I need every last dime to pay down my mortgage and save for the future. And stocks are probably the worst investment I could make right now. Because they are sure to lose value in the coming months.

So where am I putting my money now? To explain my current investment strategy I have to start at the beginning. And tell you about both of my grandfathers ...

It started on a boat
My grandfather, "Mac," lived through the Great Depression in the small farming town of Platteville, Wisconsin.

He saw families lose their entire life savings after the 1929 crash (and most everything else, too). He vowed to never own one share of stock. And he never did.

About the time Mac was struggling to get by, my other grandfather, Fritz, was arriving by steamship in New York Harbor.

A Swiss, Fritz didn't speak a word of English. And though he meant to travel to Pittsburgh to become an apprentice at Westinghouse -- now CBS (NYSE:CBS) -- he ended up elsewhere after repeating what the man in line ahead of him told the customs officer, "Chicago."

He would later go on to become an electrician. And a faithful believer in the market. He bought stocks religiously.

So who ended up better off?
Well, both of my grandfathers accomplished everything they wanted in life. Through hard work and saving they were both able to go to college, raise families (who would also become successful), and retire comfortably. So I can't say who was "better" off.

But the difference is, Fritz attended college when he was in his 70s!

While most people his age -- like Mac, for instance -- were living off pensions and savings accounts, Fritz was living out his dreams traveling the world and becoming an artist at the University of Wisconsin. All thanks to a comfortable cushion of wealth built investing in stocks.

(In fact, his investments even helped pay for my tuition at the University of Pittsburgh, where I also dabbled in art -- if you consider novelty t-shirts "art.")

My grandpa Fritz, the stock jock, spent almost 30 years in retirement. He proved to me that I can build wealth in the stock market on my own -- without a trust fund or a million-dollar executive bonus.

That's why every payday I buy stocks. Last payday I bought more shares of Apple (NASDAQ:AAPL). Even though I know I'm buying quality, it's not easy right now. But I force myself to do it.

Because every time I think about cashing out, one thought prevents me from pulling the plug ...

The undeniable power of the stock market
It's easy to become bitter and swear off investing for good after losing half your wealth. And the media is quick to point out parallels between today and the Great Depression. But the fact remains ...

We are 11 for 11. Every recession in U.S. history has been followed by a full recovery. Not even financial collapse, war, and famine could keep the market from handing its investors an average return of 10.3% (not adjusted for inflation) over the 20th century.

Yet most investors earn far less of a return than that. In fact, according to a study by research firm Dalbar, from 1987 to 2007, when the stock market gained 11.8%, individual investors only managed to earn 4.5% a year.

This startling statistic means that most people barely managed to outpace inflation during a time when we saw some of the greatest bull market runs in history. How is that possible?

Because they chased performance, moving into stocks when they're were hot ... and out when they were lagging. Just as some "experts" are telling you to do today!

Break the cycle
By now you might be thinking it's easy for me to be so cavalier about buying stocks. After all, I'm not staring down the barrel of retirement. But that's precisely my point ...

I'm not trying to pull a Nostradamus and predict the market. I'll leave the unrealistic forecasting to the financial wizards.

Instead, I'm taking more of a Dr. Phil approach. Because more than anything else, the market is driven by emotion. And right now an irrational fear of a complete economic collapse is pushing some of today's best blue-chip stocks down to epic lows.

Just have a look at the stocks below. Each has seen its share price fall dramatically over the past year. And each has a P/E ratio that's well below its five-year average:

Data from Morningstar.

It's hard to believe that these profitable blue chips could stay at prices this low for long. But investors are fearful. And some of today's best stocks are going for bargain prices.

It's the same fear that scared off Mac, like many of his generation, from investing forever. In the 50 years after the Great Depression, he never owned a single share of stock (not even a share in the NFL's only publicly held team, his beloved Green Bay Packers).

Mac missed out on building wealth in the stock market (but he was a heck of a golfer -- and you can't buy those kind of skills!).

Fritz, on the other hand, bought and held stocks for decades, even during deep recessions and sell-offs. He built his wealth the old-fashioned way and didn't succumb to fear. And I intend to do the same.

Of course, that's easier said than done. I, for one, will be adding money to stocks, slowly and diligently.

Buy now, don't cash out
I'll be focusing even more on quality now -- there are too many good companies trading at a discount to waste time on second-rate businesses.

Want some help identifying stocks worth buying today? Like my grandfather, brothers David and Tom Gardner irritate Wall Street by refusing to buy into fear. They've made it their life's work to help individual investors, like you, build wealth over the long term with their investment advisory service, Motley Fool Stock Advisor.

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Ryan McLimans owns shares of Apple, but no other companies listed. Apple is a Motley Fool Stock Advisor recommendation. Microsoft and 3M are Inside Value selections. PepsiCo is an Income Investor pick. The Fool has a disclosure policy.