<THE RULE MAKER PORTFOLIO>
What Happened to Cash-King?
The Coming Correction
Do you need to prepare?
By Al Levit (firstname.lastname@example.org)
Glendale, CA (Jan. 12, 1999) -- Yesterday, I wrote about how we can all do our part to help out newer Fools who are just starting to learn about investing. I'm going to continue that discussion today and focus on one very common question that is often asked by newcomers. This question is a little harder to answer this year than it will be almost any other time. However, when I finished thinking through the process I still got to about the same answer.
The question is this: Is this really the time to start investing? Shouldn't I wait until the correction?
Normally, when we see this question, the person who is asking is concerned because "prices are currently so high." Usually, they have been led to this notion from the constant messages from the Wise. Some of these Wisemen have been preaching to stay away from the market since the Dow was at 3,000.
The normal, and correct answer to this question is that the market goes up and the market goes down, but over the long run it goes up by 11% a year. Short-term anything can happen, but over a mid- to long-term period, which we define as at least five years and hopefully ten or more, the chances of losing money in the stock market are very small. Money that will be needed in less than five years does not belong in the stock market.
- If you are investing in the stock market you are investing for at least five years.
- Since you are investing for at least five years, you don't care about a temporary drop short-term.
- Since you are investing for at least five years, you do care about losing this year's average 11% return.
- Therefore, you should put your money in now.
However, things really are different this year (maybe), because something will happen next year that many experts think will cause a stock market drop. That something is the Y2K computer bug, explained in detail in The Motley Fool's five part series. I'm not one of those experts, and I don't know whether Y2K will cause a stock market drop or not.
For the moment, let's assume, as some experts do, that the DJIA will fall 30% as a result of Y2K. Does that mean that investors should hold off investing until the market drops? I don't think so.
Certainly, if we KNEW that stocks were going to drop 30% tomorrow and then recover we would wait until the day after tomorrow to start investing. However, even if the Y2K bug does affect the stock market, we won't really know when stocks will drop, or much more importantly, when they will recover. First of all, the Year 2000 problem won't be confined to one day, it will start showing up in 1999 (for companies whose fiscal years end before December 31) and is expected to last in some aspects through 2001.
At some point, the stock market will start discounting the effects of the problem, and a drop in prices will occur. At another point, the market will start to price in the effect of the recovery, and an increase in prices will occur. Those who wait for the crash are likely to miss the recovery as well, in the same way that some of the permabears have missed one of the greatest bull markets in the century waiting for a crash!
In addition, at this point it is by no means certain that there will any negative effect of any consequence on the stock market from the Y2K bug. A lot of work has been done to get around this problem, especially in this country. There may be some inconveniences, such as brownouts in some rural areas, but not much else. On the other hand, things could be much worse. I guess we really won't know until about this time next year.
In any event, when it comes to investing, the Y2K problem does not seem certain enough in either its timing or its magnitude to effect how I would make decisions as a new investor. When I think of making changes as an ongoing investor (for example, selling my stocks ahead of the Y2K drop) that makes even less sense because of the tax implications.
On the other hand, I do think that some preparation can't hurt ahead of January 1, 2000:
- I don't plan to do any flying or take any other public transportation that week (I'm actually more concerned with sitting around in an airport with long scheduling delays than with crashing)
- Stocking extra food and water can't hurt (remember that your freezer and refrigerator may not have electricity for awhile)
- I will back up my entire hard drive on December 31, 1999 (I do that several times a week anyway)
- I will keep copies of my last bank statement and brokerage statement
Other than that, I plan to have a very Happy New Year on January 1, 2000. With any luck, I'll go to work on Monday, January 3, 2000, and my stocks will do just great.
I'll be back tomorrow to talk about a risky Rule-Making investment. Until then...
Stock Change Bid AXP -3 7/8 102.38 CHV -2 1/8 82.00 CSCO -6 9/16 98.13 KO - 9/16 65.44 GPS -1 3/8 58.19 EK +4 3/8 79.63 XON - 1/4 70.75 GM -3 1/2 82.88 INTC -3 7/8 135.56 MSFT -5 5/16 142.19 PFE -4 7/16 113.06 SGP -1 5/8 51.13 TROW + 1/4 36.19
Day Month Year History R-MAKER -2.55% 2.31% 2.31% 33.20% S&P: -1.92% 0.84% 0.84% 23.21% NASDAQ: -2.67% 5.84% 5.84% 39.28% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 142.19 81.67% 5/1/98 55.5 Gap Inc. 34.06 58.19 70.84% 6/23/98 34 Cisco Syst 58.41 98.13 67.99% 2/13/98 22 Intel 84.67 135.56 60.10% 2/3/98 22 Pfizer 82.30 113.06 37.38% 2/6/98 56 T. Rowe Pr 33.67 36.19 7.47% 8/21/98 44 Schering-P 47.99 51.13 6.53% 5/26/98 18 AmExpress 104.07 102.38 -1.63% 2/27/98 27 Coca-Cola 69.11 65.44 -5.31% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 63.15 79.63 26.09% 3/12/98 17 General Mo 72.41 82.88 14.46% 3/12/98 20 Exxon 64.34 70.75 9.97% 3/12/98 15 Chevron 83.34 82.00 -1.61% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 3412.50 $1534.05 6/23/98 34 Cisco Syst 1985.95 3336.25 $1350.30 5/1/98 55.5 Gap Inc. 1890.33 3229.41 $1339.08 2/13/98 22 Intel 1862.83 2982.38 $1119.55 2/3/98 22 Pfizer 1810.58 2487.38 $676.80 2/6/98 56 T. Rowe Pr 1885.70 2026.50 $140.80 8/21/98 44 Schering-P 2111.7 2249.50 $137.80 5/26/98 18 AmExpress 1873.20 1842.75 -$30.45 2/27/98 27 Coca-Cola 1865.89 1766.81 -$99.08 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Eastman Ko 1262.95 1592.50 $329.55 3/12/98 17 General Mo 1230.89 1408.88 $177.99 3/12/98 20 Exxon 1286.70 1415.00 $128.30 3/12/98 15 Chevron 1250.14 1230.00 -$20.14 CASH $120.62 TOTAL $29100.46 Note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.