Worried about the stomach-churning stock market? Looking for something to do about it? Here's my strategy: Yesterday, at approximately 2:30 p.m., I faxed a letter to one of the three health clubs to which I belong and terminated my membership.
It's roughly $143 a month, which I've been paying for two years. During that two years, I've been there all of about 16 times. That's roughly $214.50 per visit. If I buy stocks with that money as the rest of you panic over the next weeks and months, and if I earn 8 percent a year, a not unreasonable possibility, I'll have $26,161 in 10 years.
I spent yesterday talking to various professional financial advisers as the Dow sank, and all of them thought I was an idiot to be even asking where else, besides the stock market, I should be putting my money. They said I should be buying.
Okay, let's say the market is overvalued, a lot overvalued. There's still little else out there that many are willing to recommend as an alternative that might do better over the long run, meaning over the next few years.
Your certificate of deposit will get you, say, 5 percent a year. After inflation and after taxes, that could be down to 3 percent. Your money market fund? Same, at best. These are parking places, not investments.
Gold? Seriously unpredictable these days. First there's too much; then there's not enough. One day a central bank comes along and says it's dumping it, the next it announces it has changed its mind.
How about what we used to call "defensive" stocks--companies that sell things people must have, such as toilet paper and toothpaste? There aren't many true believers left who argue that, in the long term, these do any better than other stocks. They may look pretty when your tech portfolio is in trouble, but they're going to be mighty ugly when tech recovers.
I can hear the conversation now:
"So, what are you into these days, Fred?"
"Toothpaste. . . . Yeah. Yeah, I know. I got stuck with it during the panic of '99."
The bond market? Okay. You won't lose your pants, certainly with government bonds. Some people do very well indeed investing in bonds. You know you'll get the face value of the bond at maturity, whether it's $1,000 or $1 billion.
But ask yourself, can you explain how bonds work? Can you tell your kid why the yield moves in the opposite direction of the price?
If you can, maybe bonds are for you. Just remember, if you're thinking of selling stocks to buy the bonds, and you've made money on those stocks, subtract the capital gains tax you're going to pay from whatever you might invest in those bonds.
If you don't understand it, don't do it, especially in an environment of unpredictable interest rates. That goes for stocks, too.
Here's the real investment conundrum. Various signals of relatively mild inflation are popping up, like yesterday's numbers on rising producer prices. Institutional investors and money managers worry that, seeing this, the Fed will raise interest rates to stop inflation. Rising interest rates tend to increase the cost of doing business, reduce earnings and cut the price of stocks, so money managers bail out of stocks.
In fact, if the Fed succeeds in stopping inflation, stocks will do better, not worse, in the long run. There's nothing, nothing, worse than inflation, short of recession and inflation at the same time. The record is well established that people who are in the market and drop out, hoping that they'll avoid losses, tend to incur losses when compared with people who kept their heads.
Plus, the stock market will be healthier for the letting off of a bit of heat. The hotter it gets, the jumpier the big money boys are. The slightest thing sends them scurrying, like Alan Greenspan's speech Thursday, in which, if carefully read, the Fed chairman said that investors just may be smarter than everyone thinks, prepared to pay more for stocks because they're in for the long term.
So what's the individual investor supposed to do?
"Stop watching CNBC," said Robert Sheard, author of "The Unemotional Investor" and director of Sheard and Davey Advisors, based in North Carolina. "Play golf. Take your family out to dinner. Just stop watching the stock market. This is the hardest thing for our clients. If your horizon is a decade, what do you care what happens next week? . . . If you're not capable of turning off your emotions, you don't belong in stocks even though they are the best investments. Buy a government bond and accept that you're going to lose a lot to inflation over the next couple of years."
"I can't imagine where you would turn for safety or profitability if you have reached the conviction that stocks aren't it," said Ric Edelman of Fairfax-based Edelman Financial Services. Sell stocks now? No--buy them. "Do you walk into Nordstrom and buy a sweater when it's 10 percent above its ordinary price? Or do you wait until it's 10 percent off," which is where the market is, roughly, at the moment.
If the big managers are selling, shouldn't you?
"The goal of the money manager is to outperform the market," said Tod Barnhart, of Barnhart Group investment advisers (and author of "A Kick in the Assets").
"The goal of the individual investor is to get to a particular point by a particular time. If your goals are three to five years or longer, you've got to sit tight. In this environment, the stock market is the only game."