We knew it was coming, but it's the news we've all been dreading. Yet there it was recently, front and center in The Wall Street Journal:
"Rank-and-file investors are losing faith in stocks."
The story is predictable
Yesterday, after all, we experienced yet another near-4% drop, plunging stocks close to their bear-market lows of November. Small investors, shell-shocked by losses this year, are selling what's left of their stocks and stashing cash in bonds and FDIC-insured CDs. According to recent data from the Investment Company Institute (and reported by the Journal), "Investors pulled a record $72 billion from stock funds overall in October alone ... [and] fund companies say withdrawals have remained heavy."
Indeed, Journal writer E.S. Browning profiles three such investors. The first, a 52-year-old, was "a big believer in stocks in the late 1990s" but is now putting all of his cash in CDs. The second was an aggressive investor in the 1990s, but moved to "a more conservative mix after the 2001 terrorist attacks" and has since become more conservative. And the third, a 25-year-old, loved stocks when he was earning 10% to 20% per year earlier this decade, but has now "shifted his retirement savings to corporate bonds, a money market fund, and a few utility funds."
That'll work out well
Look, let's get this out of the way right now. There's a place for bonds, CDs, and smart asset allocation in every portfolio. But what these three investors have in common is that they were buying stocks when they were high and going higher and are now selling stocks when they're low and (potentially) going lower.
In other words, they bought high and sold low ... exactly the opposite of what you want to do as an investor!
Now, I can understand the 52-year-old's motives better than the 25-year-old's. The former is nearing retirement and wants the security of a stable cash nest egg. But the latter is at least 30 years (probably more) from retirement and is likely dooming himself to decades of subpar returns.
Provided the reporting is accurate, of course
Given plummeting interest rates, the best money market rate I can find today is 3% per year. At that rate, $10,000 will turn into about $24,000 over 30 years.
As for stocks, they don't generally decline 40% per year (as they did in 2008) all that often (though such declines are difficult to predict). In fact, over the trailing-30-year period stocks have returned about 7.6% per year -- which would turn that same $10,000 into about $90,000 ... a pretty darn big difference.
All of this is to say, if you have plenty of time until retirement (let's call it 10 years or more), now is the time to be a buyer of stocks. Given depressed valuations, you may even do better than 7.6% per year. And even if you're nearing or in retirement, chances are you have some money that you don't intend to spend for another 20 or 30 years. Those long-term savings are also a candidate for the stock market, though again, you'll want to have a sound asset-allocation game plan in place before you invest.
Think about it
If you believe Google (Nasdaq: GOOG ) and Amazon.com (Nasdaq: AMZN ) will be dominantly profitable media titans 25 years from now, would it be better to buy the stocks today at $350 and $60, respectively, or to have done so 12 months ago when they were 15% to 30% higher?
That's not to say they can't go lower from here, but when you buy stocks, you should do so with the same time horizon as your money.
Similarly, if you believe China is the next global economic superpower, then you can't beat today's prices for China Mobile (NYSE: CHL ) and PetroChina (NYSE: PTR ) , the country's telecom and energy giants, respectively.
Finally, even if you don't believe in any individual stocks, you can still park your long-term money in a low-cost total market index fund (Vanguard's Total Stock Market Index (VTSMX) is a good choice), which will give you exposure to fantastic, dividend-paying firms such as Coca-Cola (NYSE: KO ) , Procter & Gamble (NYSE: PG ) , and Microsoft (Nasdaq: MSFT ) .
Yet these are the stocks investors are selling today. It just doesn't seem to be the smartest long-term move.
This is ...
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Tim Hanson does not own shares of any company mentioned. The Motley Fool owns shares of Procter & Gamble. Amazon.com is a Motley Fool Stock Advisor recommendation. Microsoft and Coca-Cola are Inside Value selections. Google is a Rule Breakers pick. Please congratulate the Fool's disclosure policy on declaring itself the world's best.