Down market can present good deals

August 17, 2008|By Carolyn Bigda | Carolyn Bigda,Tribune Media Services

There's never a bad time to start investing in stocks, many experts say. But there are periods when making the leap takes a lot more nerve.

Since October, the Standard & Poor's 500, an index of widely held U.S. stocks, has largely been in retreat. Earlier this summer it was off more than 20 percent, pushing it into bear territory, although it has since rebounded some.

It's clear that the near-term outlook is less than rosy. Uncertainty over oil prices, the banking sector and home values has driven even seasoned investors to the safety of cash and government bonds.

But as scary as the stock market may seem, there are some big advantages to mustering whatever courage you can and jumping into the storm now:

Stocks at a discount. There's no better time to go shopping than when stores are having sales. And that's what's going on in the equity markets today: Broadly speaking, stocks are on sale. Invest in them now and you may be picking up good deals.

Admittedly, it's a lot easier to commit to, say, a pair of shoes on clearance than to risk your savings for the first time in a down market.

"There are very few inexperienced investors who can tolerate even a 10 percent to 15 percent loss," William Bernstein, author of The Four Pillars of Investing, wrote in an e-mail.

Most people have to endure a few market cycles - periods of rising and falling stock prices - to become comfortable with losses, he said. So for nervous young investors, Bernstein suggests putting one-third to one-half of 401(k) contributions into stocks and the rest into bonds.

"When the market finally recovers tomorrow or in 10 years, they'll wish they had put in more" into stocks, he said. "They'll remember for next time, and by then have developed some more risk tolerance."

Time on your side. There is a good chance you could invest today - and the market nose-dives tomorrow.

The last bear market, for example, ran from 2000 to 2002.

Someone who invested $10,000 at the start of 2002 in the Vanguard Total Stock Market Index fund would have amassed $13,336 by the end of last month.

But someone who waited until the fall of 2002, when stocks bottomed, would have a portfolio worth at least $1,000 more.

Wait too long, however, and you could miss out on the big rebound: Cautious investors may not have expected funds like Vanguard Total Stock to finish 2003 up 31.4 percent.

A young investor with a long time horizon is again at an advantage. With decades to go before retirement, you don't have to sweat these short-term swings as a retiree would. You have time to make up losses and, with any luck, wind up with a positive average return.

A long-term strategy. Safe investments like cash and bonds may seem appealing now compared with the performance of stocks.

From Jan. 1, 2002, through the end of July, the Vanguard Total Bond Market Index fund had an average annual return of 4.7 percent. The Total Stock Market Index fund returned 4.5 percent.

But "the longer you look out, the more likely it is that stocks will outperform," said Paul Larson, an equities strategist at Morningstar Inc.

Keep in mind, too, that investing is not a one-time event. "Sure, you may lose money on the first lump sum you put into the market, but you're not going to lose money every time after that," Larson said.

Looking at the example of someone who invested $10,000 on Jan. 1, 2002, but this time continued to invest $200 each month thereafter, the money would not only have grown - it would be worth more than $30,000 by the end of July this year.

Carolyn Bigda writes for Tribune Media Services.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.