As I type this article, the stock market as measured by the S&P 500 is down more than 7% so far this year -- and it's still only January. That's rather alarming, if you think about it. If, through the end of last year, you had slowly and with great effort built a nest egg of $300,000, if invested in the market, it would be worth less than $280,000 right now.
Meanwhile, who knows ... this might be the beginning of a bigger slide. By December, your nest egg might be worth just $240,000. It could happen.
Many people look at this situation and say sayonara to the stock market. They take their toys and go home, selling off various holdings. In fact, that's kind of why the stock market is down -- the lower prices of stocks reflect a lot of selling going on. People are fearful, so they sell. Here is how some well-known stocks have fared through late January:
|
Stock |
Year-to-Date Return |
|---|---|
|
Merck (NYSE: MRK) |
(17.4%) |
|
Goldman Sachs (NYSE: GS) |
(8.7%) |
|
Freeport- McMoRan (NYSE: FCX) |
(15.4%) |
|
Boeing (NYSE: BA) |
(7.4%) |
|
Disney (NYSE: DIS) |
(10.8%) |
|
3M (NYSE: MMM) |
(7.5%) |
|
Caterpillar (NYSE: CAT) |
(4.4%) |
It's not the time to buy if ...
So what should you do? Well, I recommend staying out of the market, if you don't want to make much money. I recommend selling your stocks, if you'd rather make considerably less money, but more reliably. For example, you could switch to bonds. Leave your money in a bond for its lifetime, and you're likely to get just what you were promised -- a certain percentage gain.
Of course, that percentage is less than you're likely to get with stocks over long periods. According to the research of business professor Jeremy Siegel, stocks have outperformed bonds 74% of the time over all five-year periods between 1871 and 2001. Over all 10-year periods in the same span, that figure rises to 82%. Meanwhile, stocks outperformed bonds 95% of the time over all 20-year periods and 99% of the time over all 30-year periods!
But here's the thing ...
So what am I really saying here? Just this: If you want to increase your wealth, based on past performance, it's clear there are few more effective ways to do so than via the stock market. How can I suggest that you stay in -- or (gasp!) buy more -- when the market has been tanking? Well, I remember the advice of my hero, Warren Buffett, who advised being fearful when others are greedy and greedy when others are fearful.
After all, if you want to buy something -- say, a television, or a hamburger, or a house -- shouldn't you be happy to see falling prices? With the market down, that means a lot of good companies have their stocks on sale. It can't be true that all of a sudden, all the market's companies are stinkers, can it? No. It's just that sometimes when the market heads south, it takes most stocks with it, no matter their health or promise. Do 3M and Goldman Sachs have bright futures? If you think they do, you might want to take a close look at their stocks. Now.
What to do
I encourage you to look at our slumped market and instead of panicking and selling, like many people are doing, just hang on. Or better still, consider buying some stocks. Sure, they may fall further. But eventually, if they're tied to healthy, growing, competitively strong firms, their prices should rise. That's the way you can make lemonade out of the market's recent crop of lemons.
