What I thought of the stock market drop
March 2nd, 2007 | by mbhunter |The big drop in the broad indices on Tuesday was hard to ignore. In one day the indices handed back their gains for the first two months of the year. It wasn’t the biggest percentage drop or even the biggest point drop, but it was the biggest single-day point drop in about five years.
Certainly a lot of people were selling, but others didn’t. Some folks were hardly tempted to see how much their portfolio lost, figuring there was very little they could do about it anyway. Others took comfort in the tried-and-true philosophy of slow, sure, long-term investing, not necessarily enjoying the drop but looking forward perhaps to picking up cheaper shares.
This has been level-headed advice for decades. Stocks go up if you stay in for The Long Haul, and if you invest a set amount regularly, you’ll buy a lot of shares when the price is low and fewer when the price is high. Thus far, The Long Haul hasn’t been so long that people didn’t reach the light at the end of the tunnel.
The Dow has cracked an all-time high recently, but it’s not that far ahead of its previous high in 2000 after adjusting for inflation. The S&P 500 is still below its high in 2000, even without adjusting for inflation. And the NASDAQ? It’s only half of what it was in 2000.
Now, it’s true that if you invested faithfully each month in index funds over the past seven years, you’d be ahead a bit, and you’d be substantially ahead if you’ve been investing regularly this way for twenty years. But on the whole, the stock market hasn’t recently been producing the 6 to 8 percent gains that are comforting to punch into a retirement calculator.
I can’t predict the future. No one can. And it certainly is reasonable to look at this drop as a healthy correction or volatility. But how much more sideways motion can you stomach? How many more $100 monthly investments can you make into your index fund that just seem to spin their wheels? How many more gain-forfeiting drops do you want to watch before you throw up your hands and pull out?
I’m not saying to second-guess yourself, but buy-and-hold investing is an assumption.
For myself, I’m not running for cover yet, but at the same time I’m just not comfortable with staying the course in the stock market until retirement for a number of reasons. I don’t see the next thirty years giving us more prosperity the same way the previous thirty years got us to where we are now. This recent stock market dip added to that uneasiness.
7 Responses to “What I thought of the stock market drop”
By KMC on Mar 2, 2007 | Reply
I have some of the same thoughts. I see reasons to believe, as you state, that the next 30 years may not match the previous 30. I also hate having my monthly automatic investment disappear into the hole of a falling market.
But ultimately I come back to this question – what’s the alternative? If not the stock market (in a appropriately diversified portfolio), then what? For me, there isn’t an alternative – just going to have to grit my teeth and press on.
By Easy E on Mar 2, 2007 | Reply
If the economy is headed for trouble or for a boom then index funds will ride along. So if we aren’t going to see the growth we’ve had in the last 30 years in the next 30, then there is only one logical investing approach as I see it. Buy good companies at cheap prices.
Because of the general sell-offs the past week many good companies took hits because of general fears about the market. If the price is right and the company is sound then you should buy. Owning single stocks is a bit riskier than indexes but if you think that we are headed for slow down then it could actually be less risky IF you find the right company.
By listerwato on Mar 2, 2007 | Reply
i used to do a lot of trading stocks and made a fair amount of money. however did not sleep all that well. NO MORE. i buy mutal funds, mostly index and quit worrying about the stock portion of my portfolio. cd’s and large bank prefereds round out my IRA investments and my returns have been considerably more than RMD. : > )
By James on Mar 10, 2007 | Reply
MBH,
Why be pessimistic? The economy is doing well, business taxes are low, our workforce is still well educated. There are lots of reasons to invest for the long haul…
Best,
James
By mbhunter on Mar 14, 2007 | Reply
Thanks for your comments!
Alternatives: precious metals and other commodities, diversifying your skill set, starting a side business …
Some companies may be good investments, true. I’d look to companies that fix or maintain what people already have, and companies that fix up people’s financial mistakes.
James: Not sure where you see business taxes as low. Business taxes are pretty oppressive. Nor do I see us as particularly well-educated: take a look at a science department at a major university and look at how many of the names appear to not be American. And the economy? Another record-setting trade deficit, the stock market drops when Greenspan sneezes, and subprime lenders are starting to get investigated. Ridiculous amounts of foreign investment to keep our dollar from tanking. Doesn’t look particularly healthy to me.
By campton-stock market investing on Oct 16, 2008 | Reply
The stock splitting will not affect the total value of the stock, but it will affect the value of each share. This can be a very good thing for the owners of the stock. Typically when a stock splits it will encourage more buyers to purchase shares and can cause the price to increase again after the split.