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Don't Abandon Stocks
These stock funds will help you regain what you lost in the worst bear market since the Great Depression.
By Steven Goldberg, Contributing Columnist, Kiplinger.com
February 17, 2010
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In the 1930s, Benjamin Graham, the father of security analysis, likened investing in stocks to doing business with a manic-depressive. Little has changed over the decades.
Indeed, stocks have been wackier than usual lately. In October 2007, the stock market began its worst fall since the Great Depression. There was widespread panic when Lehman Brothers failed in September 2008. By the time the market bottomed, Standard & Poor’s 500-stock index had plunged 55% from its peak. Then, on March 9, 2009, for no readily apparent reason, the market abruptly reversed course and delivered one of its most rousing comebacks ever. Since then, the S&P 500 has rocketed 62%.
A perfectly understandable reaction to such zaniness is to flee, to find another business partner. Millions of Americans have done just that. They have yanked money out of stock funds and poured hundreds of billions of dollars into bond funds. Others remain paralyzed -- unable to move for fear of making a mistake.
That’s nothing new. After the 1929-32 crash, during which the stock market crumbled some 90%, most Americans shunned stocks for a generation. People behaved similarly after the 1973-74 bear market.
Losing money hurts. Your investments are often the difference between a comfortable retirement and having to work until you drop. I lost a lot of sleep during the most-recent bear market. Although I’ve written about investing since 1991, this was the first bear market in which I had flesh-and-blood clients. Every day, I watched their nest eggs (and my own) shrink -- and I was partly to blame. I kept asking myself, why hadn’t I sold stocks, for both myself and my clients, after Lehman collapsed?
I called my clients frequently to urge them to stay the course. But I sometimes doubted my own words. Were we on the verge of another Great Depression? If so, it would be years before my clients and I regained all of our losses.
What to do now
When I write columns, it’s a lot less personal than talking to a client. But I want to speak to you now as personally as I can.Please don’t abandon stocks. Without them, it’s unlikely that you’ll regain what you lost.
The long-term numbers deliver a clear message. From 1926 through the end of 2009, the stock market returned nearly 10% annualized. Long-term government bonds gained a bit less than 5.5% annualized. Inflation averaged about 3%. The returns were roughly the same for the hundred years before 1926. The pattern holds true in overseas markets as well.
If you find yourself paralyzed by fear, find someone you can talk to about your investments. This can be your spouse, a work colleague -- anyone who needs his or her money to grow, as you do, and in whom you feel safe in confiding. The stock market is simply too crazy to handle all on your own. Even Warren Buffett, the greatest investor of our time, never makes a move without talking to Charlie Munger, his right-hand man.
The first thing to ask yourself is, what is your target and when will you reach it. If you’re more than ten years from, say, retirement, you should invest 80% to 100% of your money in stocks or stock funds. If you’re closer to retirement, put between 60% and 75% in stock funds. In retirement, invest 40% to 60% of your money in stock funds. Put the rest in bond funds. The more you have in stocks, the better you’ll probably do over the long term. But the more you have in bonds, the easier it will be to sleep.
Unless you enjoy picking stocks and funds, stick with low-cost Vanguard index funds or exchange-traded funds. For your stock money, put 70% in Vanguard Total Stock Market Index (symbol VTSMX) or Vanguard Total Stock Market ETF (VTI) and the remaining 30% in Vanguard FTSE All-World ex-U.S. Index (VFWIX) or Vanguard FTSE All-World ex-U.S. ETF (VEU).
With your bond money, buy Vanguard Total Bond Market Index (VBMFX) or Vanguard Total Bond Market ETF (BND) in a tax-deferred account. In a taxable account use Vanguard Intermediate-Term Tax-Exempt (VWITX).
Once you decide what to buy, follow one of the oldest pieces of advice around: Put a little of your money into stocks every month. Take it from your paycheck, the bank or your bond funds. Aim to get fully invested in 12 months.
Avoid acting on the basis of market forecasts -- no matter who makes them. No one knows what the market or the economy will do -- especially short term. The overwhelming majority of market strategists failed to predict both the last bear market and the current bull market. Similarly, economists and the Federal Reserve didn’t realize how bad the economy was until it was almost out of control.
When to start investing? There’s no time like today.
Steven T. Goldberg is an investment adviser in the Washington, D.C., area.
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Reader Comments (5)
Posted by: Daniel Martin at 02/17/2010 01:12:20 PM
How many fortunes were lost in the stock market "window" Mr. Goldberg refers to? The world economy is broken in a basic way, and our governments are ill-equipped to help them heal. Investing in stocks right now is whistling past the graveyard.
Posted by: Nomen at 02/17/2010 02:39:05 PM
First, the 55% plunge from the peak was a whole lot larger loss than the 62% (rocket) up from the bottom is a gain. As I contemplate the purchase of more stocks, I see the same unregulated system that existed before. Even most of the same greedy and overpaid leaders are still there wallowing in undeserved bonus money from taxpayer bailouts. The more I see Wall Street fighting meaningful regulation, I more certain I am that I do not want to invest with them again. Luckily, only a small potion of my retirement was in stocks and I am now way ahead of those that put their faith in that annualized 10%. As far as history goes, prior to the 1970s, stocks were much more realistically based on a company's real value. Today we are using pretend money to buy imaginary value. Historical comparisons are pretty weak.
Posted by: Richard at 02/18/2010 01:57:21 PM
What you are forgetting, Sir, is that the Crooks and politicians who started the '07-'09 decline, have yet to be held accountable. People are scared, and rightfully so. They don't trust the Social Engineers and the incompetence of Big Government. They fear for their jobs and when Big Government and THE NEXT BAND OF THEIVES will take what they have left. If the market was allowed to perform without manipulation, it may recover and yield the 10% you spoke of. There are too many O'bama type crooks out there to trust that though.
Posted by: Marty at 02/18/2010 03:17:33 PM
Good corporate bond funds (like Vanguards intermediate corporate bond fund) have performed far better in comparison with equities. Energy pipeline MLPs also offer nice distributions in the 6 - 8% range and largely tax deferred plus offer some capital gains and increase their payouts quite regularly over time as the rates they charge go up and they expand capacity. MLPs have far lower volatility than the stock markets. There are lots of other investment opportunities out there than just stocks and government bonds that can help people sleep at night.
Posted by: Steven Goldberg at 03/17/2010 07:56:46 PM
Hi, Steve Goldberg, author of this column here. All of your comments are valuable. Thanks for commenting. But these are the kind of things that tend to be uppermost in our minds AFTER a huge bear market--not beforehand. I've written about all the topics you discuss. I very much want to see meaningful financial re-regulation. I think, though, that the bottom line remains the same: There's no smart money; no one can time the market's short-term swings; and stocks historically have achieved better returns than anything else--regardless of who is running Wall Street or Washington, D.C.