Stock turnaround: Don't believe the hype
No one really knows when the market will improve, but there are a few things you can do to prepare for the future.
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| Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005). |
NEW YORK (Money) -- Question: I'm so tired of hearing the same old BS from people speculating about when stocks will turn around. I really don't think anyone knows anymore. It's frustrating to read encouraging news and then see the Dow and the Nasdaq fall. Won't someone please say that they haven't the faintest idea what's going to happen in the market and stop pretending that they do? --Don, Rochester, New Hampshire
Answer: If it will make you feel any better, I'm happy to admit that I don't have a clue about what the stock market will do in the near future. And whether they admit it or not, I don't believe anyone else does either.
That's nothing new, though. We were just as clueless about the market's path back in October, 2007 when the Dow was at its all-time high. If people had known what lay ahead, they'd have taken action to protect the value of their 401(k)s and other investment accounts. The only difference today is that with the economy and markets in a funk we're suddenly aware of what we don't know, and that makes us feel uncomfortable.
That said, I also don't think this inability to predict the market's short-term movements should be cause for despair or, for that matter, taken as a reason to stuff all your money under your mattress or assume we're spiraling into an economic Armageddon from which we'll never recover.
Why? Well, although I wouldn't even try to predict how things will work out in the short term, I think it's perfectly reasonable to have confidence in the long term. Eventually the economy will turn around and the market will recoup its losses and climb to new highs.
Granted, I can't be certain. But history shows that the U.S. economy has recovered from serious challenges many times before. If you go to the National Bureau of Economic Research's business cycle site, you'll see that since the mid-19th century the U.S. has weathered 32 recessions, several of which have been real doozies. This downturn is number 33, and I'm sure it won't be the last.
I realize, of course, that just because we've recovered from past economic difficulties, there's no guarantee it will happen again. But if you think about it, it's not just luck or historical inevitability that's led to recoveries in the past. It's the fact that, at the most basic level, we've got an economic system that's simple, effective and leads to long-term growth: People seek work so they can feed their families. Businesses seek workers so they can earn a profit. And investors seek businesses to invest in so they can get a piece of that profit in the form of dividends and share-price appreciation.
Clearly, this oversimplifies things. But this dynamic essentially drives our economy and markets. And as long as that dynamic remains in place, our economy should continue to recover from the inevitable periodic busts and go on to new booms. And since the market typically leads an economic rebound by six months or so, I'd expect stock prices to revive before the economy recovers.
How long will that recovery take? Most economists seem to think we won't see even the beginnings of a turnaround until late this year. Überinvestor Warren Buffett has suggested it could take longer, maybe five years. But, again, no one really knows. A lot depends on how quickly consumers regain confidence, which, understandably, remains at a low ebb these days.
So what does all this uncertainty and anxiety mean if you're investing for retirement or your overall financial security?
Well, for all the talk you hear about how all the rules of the game have changed and you need to re-examine the way you invest in this brave new world, I believe it's time to look back to some time-honored investing principles.
The first is to make sure that you've got an asset allocation strategy that makes sense for your situation. We don't know when the market will turn around and what may happen until it does. So your best defense in the face of such uncertainty is spreading your money around.
If you're in the early stages of your career and contributing to your 401(k) for a retirement that's decades away, you still want to have the bulk of your assets in stocks. It would be foolish to avoid them now when you have so many years of investing ahead of you, especially since you have the opportunity to pick up shares at depressed prices.
If, on the other hand, you're nearing retirement or already retired, you don't want to stake too much of your retirement savings on stocks even if you believe they're attractively priced at current levels. Fact is, stock prices could still fall further before they turn around. And if you're going to be depending on your savings for retirement income anytime soon, you don't want to run the risk of incurring a big hit to your portfolio just as you're drawing on it.
As a general guide to how you might divvy up your assets between different types of stock and bond funds as well as cash at different stages of retirement planning, you can check out the target-date fund for someone your age offered by Vanguard and T. Rowe Price.
The second thing you want to do today is maintain your equanimity. Troubled times like these generate lots of scary headlines. Your natural impulse is going to be to make a move of some kind. And there will be no shortage of pundits seconding that urge. Dump stocks! Buy bonds! Get into cash! Gold is the answer!
But if you've got a reasonably diversified portfolio that makes sense given your age, financial goals and tolerance for risk, you should resist the urge to react. Or at the very least, don't make a move until you've really thought it through. If you've taken the time to create a long-term strategy, the odds are low you'll need to make dramatic changes.
The bottom line, Don, is that you're right. Nobody knows how the economy and the stock market will fare in the short-term. But you'll be doing yourself a disservice if you let that fact plus all the conflicting information, the turbulence, the whole hurly burly sidetrack you.
Ignore the noise and focus on setting and maintaining a workable strategy that will get you through these tough times but also leave you positioned to participate when the turnaround arrives, whenever that may be.
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