To help regain what you lost, don't abandon stocks
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 percent 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 percent.
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 percent, 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.
What to do now
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 percent annualized. Long-term government bonds gained a bit less than 5.5 percent annualized. Inflation averaged about 3 percent. 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.
What to consider
The first thing to ask yourself is, what is your target and when will you reach it? If you're more than 10 years from retirement, you should invest 80 to 100 percent of your money in stocks or stock funds. If you're closer to retirement, put 60 to 75 percent in stock funds. In retirement, invest 40 to 60 percent 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 index funds or exchange-traded funds.
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 area.