Courtesy : http://www.allstarstocks.com
It’s a
lesson learned many times over in recent years: buy on the dips. For the
past two decades, every time the market took a significant fall,
investors who bought on the dip were soon were rewarded with a
profitable bounce.
But the year 2000 taught investors a new lesson: there
are no sure things in the stock market. With few exceptions the Dow
blue chip stocks were anemic and the NASDAQ was abysmal. Anyone who
spent the past year buying tech stocks on the dips knows now what’s it
like to be kicked right in the assets. Instead of the dip and bounce, it
was the dip, double-dip, and triple-dip.
Investors lost a whopping $5 trillion in market
capital over an 12-month period—dwarfing any market collapse in the
history of the U.S. stock market. At times like these, it’s easy to
second-guess your investment strategy. And perhaps some second-guessing
is in order. Once you’ve experienced the market’s dark side, you may
have a better sense of what your threshold for risk really is. You also
may have a better appreciation for diversification, dollar cost average,
and some of the other conservative tenants of investing.
Just don’t get carried away. The one thing you don’t
want to do is make a radical change in your investment approach.
Remember, the past year was an exception. Most years, the market goes
up. In fact, the Dow Jones Industrial Average has set new highs 17 of
the past 20 years. The odds still strongly favor investors who keep
their money in stocks.
So what should you do in a bear market? If you’re a
long-term investor you do roughly the same thing in a bear market that
you would in a bull market. You buy right through it. You make a
continuing series of small bets. You select good quality companies and
continue to build a position in those companies.
No question about it, it’s hard to get psyched up to
invest good money in a bad market. In fact, it’s hard to keep from
selling out of a bad market. You see your net worth continuing to fall.
You see the money you invest being swallowed up into the steady slide of
the market. You worry that the market may never turn around, and that
all you’ve worked for, saved for, sacrificed for, will be lost.
Those types of emotions have caused more than a few
investors to fail in the market. Fear drives many investors out of the
market at the wrong time—when the market is near the bottom—just as
greed lures them into the market at the wrong time—just as the market
reaches an all-time high.
That’s why it’s important in times like these to focus
on the long-term. And from a long-term perspective, market
dives—painful as they may seem at the time—are the best times to add to
your positions. Successful long-term investors see bear markets as
"buying opportunities," when you can get stocks at bargain prices. Don’t
think about how much you’ve lost. Think about how many more shares you
can buy for the same amount of money.
The worst sustained bear market of the past half
century occurred from 1968 to 1981 when the Dow Jones Industrial Average
essentially stood still for 14 years. Now that’s a bear market! But
even during that bear market, including dividends, you still would have
earned an average annual return of about 4.3 percent. And that’s if you
didn’t invest at all during that 14-year period.
But if you had continued to invest on a regular basis
during that period, you would have set up your portfolio for a long and
prosperous run. Once the market turned around in the early 1980s,
investors who had a position in the market enjoyed exceptional returns
over the following 15-year period.
An investor who added $10,000 a year each year for 14
years from 1968 through 1981—the worst period of the stock market of the
past half century—would have seen his or her $140,000 investment grow
to about $2 million by 1995 and $3 million by 1997. That’s an average
annual return of about 15 percent. And all as a result of investing
during the stock market’s darkest hours.
An investor who bought into the market right after the
crash of 1987 would also have fared very well over the next 24 months.
From its low of 1739 in the fall of 1987, the Dow moved up to about 2700
by the end of 1989—a two-year return of 56 percent. That’s why it would
be a mistake to sell out of the market or cut back on your investments
during slow times. Because once a market bottoms out, the returns on the
bounce can be exceptional.
The hardest part is hanging in there while watching
your investments plummet. Next time the market is tanking, and your
commitment to stocks is wavering, here are some thoughts to consider:
Investing is a marathon, not a sprint.
Wall Street experts tend to be on a different schedule than you.
They’re running a sprint—looking for the best possible short-term
returns—while you’re in a marathon—investing for the long-term. So when
you listen to the Wall Street experts, you run the risk of getting
caught up in their game, not yours. You don’t have to be concerned about
the price of stocks today, about the next Fed meeting, or about whether
IBM makes its numbers. Those are all short-term distractions. All you
have to do is ask yourself whether the long-term prospects of the U.S.
economy are solid, and where the electronics, medical technology,
telecommunications, financial, and consumer markets are headed over the
next 10 to 20 years. Clearly, unless we experience an unprecedented
economic meltdown, long-term prospects continue to be strong for a broad
range of American industries. That’s why it’s important for you to
focus on the long-term and invest with an eye on the future.
The market always sets new highs.
There has never been a crash of the U.S. stock market so severe that
the market didn’t ultimately return to its former high, and move beyond
it. That’s not to say it couldn’t happen. In the 1970s, the NASDAQ
dropped dramatically, and did not return to its former high for about
three years. After the recent market collapse, it may be some time
before the NASDAQ returns to its all-time high of about 5100, but if
history is any guide, the NASDAQ will ultimately rebound.
The goal is to build a winning portfolio. Your
job as an investor is to build a portfolio of successful companies. If
you can get a break on the price of those stocks while the market’s in
the tank, all the better. Just keep building. Over time, that portfolio
will serve you well.
