Email | Print    Type Size  -  +

Should you jump in now?

Investor Daily: Ignore, for a minute, the turmoil in the business world. If you have the time (say, six years) and patience, you may want to carefully consider the markets.

By Allan Sloan, senior editor at large
Last Updated: December 10, 2008: 8:42 AM ET

8 really, <i>really</i> scary predictions 8 really, <i>really</i> scary predictions 8 really, <i>really</i> scary predictions
Dow 4,000. Food shortages. A bubble in Treasury notes. Fortune spoke to eight of the market's sharpest thinkers and what they had to say about the future is frightening.

(Fortune Magazine) -- Has there ever been a time that feels worse than now to talk about houses and stocks? Not in my 40 years of writing about business. The sickening collapses in house and stock prices from their peaks have trimmed about $13 trillion - almost a year's output for the entire U.S. economy - from Americans' net worth.

Not since the Great Depression almost 80 years ago have we seen anything like these simultaneous housing and stock implosions, and back then houses and stocks were owned by only a relative handful of Americans, whereas in today's world, two-thirds of us own houses and half of us own stocks.

It's really scary out there. The S&P Case-Shiller index, which measures housing prices in 20 big markets, continues to fall. Foreclosures mount; dire predictions fill the air. The stock market lurches up and down like a roller coaster on steroids, and seems to fall - or occasionally rise - by 5% or more every other trading day.

Each weekend now, you expect to hear that yet another big financial institution has to be closed down or bailed out by federal regulators. Lots of us who've invested for years (including me) have had a big part of our net worth wiped out almost overnight. It makes you feel like crawling into a cellar, closing the door, and not coming out until the all-clear signal sounds.

But even though housing and stocks may be the last things you feel like talking about, they're things that you should talk about. That's because for the first time in years (or maybe decades) prices of homes and U.S. stocks have fallen low enough to be considered reasonable long-term investments again.

No, I'm not suggesting that you run out and binge-buy houses and stocks. Even though they've fallen about 25% and 45%, respectively, from their peaks, houses and stocks could well fall further, possibly much further.

That's what happens when bubbles deflate - things can fall into a reasonable-value zone, then keep on falling until they're unreasonably low. It's the other side of an inflating bubble, during which prices can keep rising even after they're unreasonably high.

But if you're prudent - I'll define that a bit later - and if you're willing and able to commit your money for at least six years, I think you'll wake up in 2015 or 2016 and see that you've done okay. You won't make the nearly 20% a year that U.S. stocks generated during the 1982-2000 bull market, or the even bigger gains homeowners and flippers made on their investments early in this century, when the housing bubble inflated. But you're more than likely to make some reasonable money, much more than you'll make hiding out in Treasury securities or money market mutual funds.

Before you rush to write checks, however, please remember that you shouldn't put money into stocks or houses or other investments unless you can do it while adhering to the three eternal verities of financial survival. They are: Live within your means or below them; shun credit card debt like the plague it is and don't borrow except for an education, a home, or a car; and use your house as a place to live, not as a cash machine or a get-rich-quick scheme.

In addition, don't start investing until you've accumulated an adequate reserve fund. To me, that means enough to cover your bills for at least three months if you (and any other employed people in your household) lose your job (or jobs).

The only exception would be to invest modestly in a 401(k) or similar retirement program to take advantage of your employer's matching contributions.

Now to our discussion. Let's start with stocks, which are easier to analyze and invest in than houses are. Stocks are selling at about the same prices as ten years ago, which means the U.S. market as a whole has been dead money for a decade.

But that may be changing. In fact, some of the smartest long-term investors in the country, who had largely shunned stocks for years, now say that stocks have moved into a reasonable zone.

Bob Rodriguez of FPA Capital (FPPTX) told a Fortune roundtable that the number of stocks that pass his value screen has risen to 447 (out of 10,000), up from only 33 in June 2007. Jeremy Grantham of GMO, another roundtable participant, considers stocks to be reasonably priced for the first time in years. Stocks have reached reasonable levels even by the tough standards of Yale professor Robert Shiller, famous for calling both the stock and house bubbles.

Company Price Change % Change
Ford Motor Co 8.29 0.05 0.61%
Advanced Micro Devic... 54.59 0.70 1.30%
Cisco Systems Inc 47.49 -2.44 -4.89%
General Electric Co 13.00 -0.16 -1.22%
Kraft Heinz Co 27.84 -2.20 -7.32%
Data as of 2:44pm ET
Index Last Change % Change
Dow 32,627.97 -234.33 -0.71%
Nasdaq 13,215.24 99.07 0.76%
S&P 500 3,913.10 -2.36 -0.06%
Treasuries 1.73 0.00 0.12%
Data as of 6:29am ET
More Galleries
10 of the most luxurious airline amenity kits When it comes to in-flight pampering, the amenity kits offered by these 10 airlines are the ultimate in luxury More
7 startups that want to improve your mental health From a text therapy platform to apps that push you reminders to breathe, these self-care startups offer help on a daily basis or in times of need. More
5 radical technologies that will change how you get to work From Uber's flying cars to the Hyperloop, these are some of the neatest transportation concepts in the works today. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.