Last night, I looked over the broken shards of what used to be my retirement portfolio. General Motors (NYSE: GM), which I bought at the absurdly low price of $8.92 several wild weeks ago, closed lower still, and now I wonder if the company really can survive a protracted credit crunch.
CNBC had been playing in the dentist's office earlier that morning while the experts worked on my teeth. The show was talking up Starbucks (Nasdaq: SBUX) as one of the few shining lights on the Nasdaq. That didn't last the day: It was down more than 5% by market close.
It goes on. American Express (NYSE: AXP), a company with plenty going for it, was down almost 18%. Eighteen percent! Its P/E ratio is now under 11 (at least until the next round of earnings, anyway). Patterson-UTI Energy (Nasdaq: PTEN) took an 11% haircut. Apple (Nasdaq: AAPL) ... you don't even want to hear about Apple.
In fact, there was only one green light in my stock portfolio today: Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B). Thanks, Mr. Buffett.
Now what do I do? What should any retirement investor do?
Is it worth doing anything at this point?
What really changed on Monday? The House shot down the bailout, but markets were already way down before the vote. A few banks in Europe went under, but did those failures really surprise the professional money managers who supposedly drive the market? The so-called “TED spread” -- a measure of interbank lending rates that pundits have been mentioning a lot lately -- hit record levels, but it was already at or near record levels.
I suppose we could argue that everything is worse by one day's increment, whatever that is. On the other hand, we could argue that we're one day closer to the bottom. One day closer to the recovery.
In the last few hours, I've read a lot of arguments about "what happens next." Some well-respected market pundits are counseling a defensive crouch: Buy gold, buy Treasuries, etc. Others are buying stocks -- big ones, safe ones -- slowly, as opportunities arise.
I think I'm with the latter group.
I'm definitely not inclined to sell anything right now. I keep telling myself that many past bear markets got worse and worse -- the daily declines larger and larger -- as they progressed, until suddenly, one day, the mood shifted and buyers outnumbered sellers.
But ...
At this point, as a professional financial writer, I feel obliged to insert this boilerplate bit: "Of course, I don't think we're there now. Economic conditions are too nasty. This bear market surely has months and months more to run."
But truth is, nobody knows how much longer the market's ugliness will last. I certainly don't have a crystal ball. Maybe Congress will approve some sort of bailout bill later this week, and maybe the markets will declare the problem sufficiently solved to start a major rally. Economic conditions will still look weak -- but some old Wall Streeters will remind you that today's market reflects a view of tomorrow, that the markets tend to go up or down a few quarters ahead of economic indicators.
On the other hand, maybe the decline won't stop until the P/E of the S&P 500 hits 10, which is ... still a long way down from here.
Hard to say.
An action plan
Here's what I'm going to do -- and what I suggest you do -- right now:
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Look carefully at actively managed stock funds. Does your 401(k) have a good actively managed stock fund with a veteran manager? Although index funds have many virtues, a good active stock fund manager can often produce better results during rough periods. Think of it like flying -- most of the time, an autopilot gets you to your destination most efficiently. But when you're flying through a rough front, it's best to have an experienced hand on the stick.
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Resist the urge to panic. Even the worst of the Great Depression was done after six or seven years. In all likelihood, this storm won't be anywhere near that bad, and for all we know, the market's recovery could start soon. It's not a good idea to sell now unless things have actually materially changed for your holdings -- why lock in losses that could be temporary?
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If you can buy stocks directly, shop carefully. Start your research with blue-chip stocks that have four- or five-star CAPS ratings, fat dividends, and relatively recession-resistant businesses, but be mindful of the fact that dividends can go away during rough economic times and think things through accordingly. If you know a particular sector well, you may want to start there instead. Look for the companies that will continue to do well in economic hard times, that have solid management and great balance sheets, and whose stock prices have been driven way down by the overall market tide.
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Stay informed. I always encourage readers to check out the Fool's Rule Your Retirement newsletter via the 30-day free trial, but if you've never done so, now's the time. Here's one reason why: There's a discussion board in there that's limited to members only and staffed by retirement experts. The folks on that board can help you sort through the funds in your plan and choose the best options for today's market conditions. New issues and regular updates will keep you abreast of developments and help you pull together a smart long-term strategy. Seriously: If you've read this far, go take a look. There's no obligation to subscribe.
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