Stocks are on sale......HOORAY!!!
By JULIA ANDERSON
U.S. stock markets are taking a beating with the Nasdaq now into bear market territory, down 20 percent from its August 2018 high. Apple forecasting lower earnings. The Dow Jones and S&P 500 are off 16 percent and 18 percent respectively from their highs. This week, we saw the biggest stock market sell-off since 2008.
This, my friends, is good news!!! Stocks are going on sale. As Warren Buffett says, "Be fearful when others are greedy. Be greedy when others are fearful."
With share prices down, investors have a buying opportunity not available during most of the past 10 years. That’s because since the Great Recession, markets have been steadily marching higher…the longest bull market in history.
Trillions of dollars floated around the world in the past decade, thanks to easy money from central banks. It makes sense that a great place to park money has been in the U.S. stock market. The money has flowed in, pumping up share prices. Over the past 10 years, the value of many individual shares more than doubled. The S&P 500 (the 500 biggest U.S.-based publicly traded companies) has increased by about 300 percent. That’s even with two corrections, the first in 2011, the second in 2016 when the S&P declined 14 percent.
Now, those who study the big picture, say we are over-due for a pull-back. Bull markets do not go on forever, even this one. They take a breather. They sell off when company shares are over-bought and over-priced. In other words, buyer enthusiasm out-strips performance. Reality must eventually set in as it is right now.
Share prices will more accurately reflect true value as they relate to earnings and profitability. It’s called a free market tied to honest (rule-by-law) quarterly reporting.
This year, volatility returned to markets. Up 500 points one day, down 600 points, the next. Graphically, this looks like the edge of a saw with jagged, sharp pointy ups and downs. News flash: This is typically how bull markets end.
Investors in their 20s, 30s, 40s and 50s should be celebrating the pull-back because this means quarterly dividend money reinvested inside their 401(k) and IRA tax-deferred funds will be buying more shares at cheaper prices. More shares mean more returns going forward as U.S. publicly traded companies continue to pump out earnings. The miracle of compound interest (dividend reinvesting) LIVES!!!
Those nearing retirement or who are in retirement must embrace a more complicated strategy:
Rule No. 1: Don’t try to “time” the market by pulling all your money out. It’s too late and besides you will miss the rebound.
Rule No. 2: Keep most of your nest egg in stocks or stock funds. Don’t touch them. Let the dividend returns reinvest. Hopefully, you have enough cash and/or income to live on while you ride out the downturn.
On NPR this morning, a young economic analyst gave me the impression that people who are nearing retirement should move their money into more secure savings such as CDs or money-market funds. Hogwash! If you do that you will run out of money before you die.
There’s nothing wrong with the American economy or its stock markets. We are just adjusting to higher interest rates (a good thing), a cooling housing market (another good thing) and more reasonable returns from corporations.
We are coming off the biggest bull market in history. It makes sense that volatility will return to markets, that we will see a sell-off in over-bought shares such as Facebook, Amazon and Google. Let’s see earnings in line with operating costs, let’s see Price-to-Earnings ratios at 20 to 30 points rather than 70.
By the way, ignore what’s going on in Washington, D.C. Warren Buffett said he never made an investment decision based on what happens in Washington.
Question: Where am I putting my money in 2019?
Answer: Individual corporate stocks such as Idaho Power, Duke Energy, MMM and McDonalds. Along with substantial amounts in S&P 500 index funds, a telecom index fund and a contrarian stock fund, all inside my tax-deferred 401(k).
I am NOT selling or trading any of these holdings. Even though I am required to withdraw cash from my 401(k), I am doing it out of a small cash fund. I have the rest reinvesting for the long-term.
The outlook for the U.S. economy remains positive, if not more normal. A 3 percent GDP growth rate is good. Job growth is good, consumer spending is positive. Inflation remains tame thanks to cheaper energy…. gasoline, oil. The Fed’s ability to raise interest rates is a good thing.
Don’t panic over the market down turn. Stay the course. Reinvest the dividend money.
Stocks are on sale!!! Buy low and hold on.
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