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When the Dow swings wildly from day to day, and when the government takes measures our country hasn't seen since the Great Depression, and when banks that predate the Civil War up and fail, the average investor is bound to have some questions.
Last week, we asked you to ask us the questions on your mind. Over the coming days, Fool advisors, analysts, and editors will be answering a select group of these questions. (With one caveat: Fools are not sanctioned to provide personalized investment advice.)
Is now a good time to buy? Is it a great time to buy? I'm so unsure of myself that I just have frozen up. ... Do you think that stock prices will fall even more? The Dow has really taken a big hit -- is this likely to continue, or will it stop?
Joe Magyer, senior analyst, Income Investor: For long-term investors, now is an outstanding time to buy. I can't tell you where the market is going in the short-run. And, frankly, anyone who tries to is full of it. But take a step back from the Yahoo! Finance page you keep refreshing and ask yourself this: Are you more interested in what your retirement account is worth today or 5, 10, even 20 years from now? Unless you need to pull cash out of your account in a big way over the next couple of years, you should be buying. Specifically, best-of-breed operators with healthy cash flows and strong balance sheets.
There are some outstanding, low-risk values out there today. Blue chips like ExxonMobil (NYSE: XOM ) , Coca-Cola (NYSE: KO ) , and Kinder Morgan Energy Partners (NYSE: KMP ) boast safe, sizable dividends that will pay you while you wait for the market to turn. Why settle for a 2.5% money market yield when you could lock in a similar or sweeter yield on a blue chip with tremendous upside? Short of a massive calamity, it is difficult to picture a scenario where those names don't crush the returns on fixed income plays over the next five years.
It takes nerves of steel to buy in this market, but remember that no great investor ever made their fortune buying high and selling low. So keep making those 401(k) contributions and resist the urge to stash your cash under your mattress. Years from now, when the value of your retirement accounts actually matters, you'll be very glad you did.
Isn't there a better way? This game seems rigged against the individual investor. Baby Boomers are on the verge of retirement, and this is what they get for decades of hard work -- a portfolio that's cut nearly in half from a year ago.
Rich Greifner, senior analyst, Million Dollar Portfolio: You're right -- the stock market is rigged. But it's rigged in favor of the individual investor. As I mentioned in an article last week, many mutual fund and hedge fund managers need to raise cash in a hurry to meet margin calls and/or redeem their investors. In many cases, this means those fund managers are forced to sell shares indiscriminately, no matter the company's fundamentals or future prospects.
Fortunately, Wall Street's loss is the individual investor's gain. Thanks to these fund liquidations, we have the opportunity to purchase shares of great companies like Microsoft (Nasdaq: MSFT ) , Apple (Nasdaq: AAPL ) , and Starbucks (Nasdaq: SBUX ) at a discount to what I believe are their intrinsic values. That's a time-tested recipe for market-beating returns.
To your second point: Such a steep drop in stock prices can certainly be unsettling, especially for investors already in or nearing retirement. But it's important to bear in mind the difference between current market prices (highly volatile, determined by investors' emotions) and intrinsic business value (relatively static, determined by a company's earnings potential). Over time, the stock market has shown us that price and value tend to converge -- and that likely means today's depressed prices will be a short-lived phenomenon.
I have a SIMPLE IRA through work with Fidelity. Do you have any suggestion of what funds would be best for the long term (as I am only 23 years old)? I wasn't really sure which ones were the best so I picked a couple of random ones.
Amanda Kish, newsletter advisor, Champion Funds: Fortunately for investors, mutual funds are one of the best tools around when it comes to saving for retirement. Unfortunately, there are a lot of bad funds out there that can sap the life right out of your portfolio. You've got to put some time in and do some digging before making your fund selections. First of all, look for funds with a manager or management team that has been around for a long time, preferably at least 8 to 10 years. It's been proven that funds with longer-tenured managers tend to perform better than funds with newbies at the helm. Make sure fund expenses are reasonable -- there's no reason to buy an expensive fund because I guarantee you there is a cheaper one available that can do the job just as well. Never buy a fund with a front-end load, either.
Finally, take a look at long-term performance and see how the fund has performed in both good and bad market environments. Ideally, you want to choose funds that participate in the good times but that also protect on the downside. Don't look at short-term return numbers; they are not really predictive of future performance. Finally, the Fidelity SIMPLE IRA offers access to some decent fund families, including Third Avenue, Oakmark, Neuberger Berman, Sound Shore, and Yacktman. You're sure to find a few great fund options there.
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