Big Sale on Stocks!

Good news, investors: Wall Street is holding a sale, offering stocks at 20% off!

The statement above comes from a publication called MarketWatch, a subsidiary of Dow Jones and Company, the publisher of the Wall Street Journal. The article also points out that those who buy stocks the day the S&P 500 enters a bear market have made an average gain of 22.7% in the following 12 months.

Also from the article: It’s important to acknowledge that this 22.7% is an average, and it didn’t work out this well in each individual case. In two of the 12 major declines since World War II in which the S&P 500 fell by more than 20%, you would have been sitting on a loss 12 months subsequent to buying on the day the 20% loss threshold was violated. But even in those two cases, you eventually came out ahead—it just took longer than a year. In any case, notice that this means that in 10 of the 12 cases since World War II you were sitting on a profit in a year’s time. Those aren’t terrible odds.

As I write this the S&P 500 index of stocks has lost about 22% of its value since the beginning of this year, the NASDAQ index of stocks has lost about 31%, and some stocks have lost much more. Unsurprisingly, investors are worried. Some have “cashed out”, “capitulated”. This would be a reasonable course of action for investors who assume that they can then return to capture market gains when the situation improves. But what would “when the situation improves” look like? It would look like when the market is selling at a discount. Like now.

To further support the notion that now is a good time to add to your equity holdings I offer a few examples of what successful investors have done in the past.   

What would Baron Rothschild do?

According to Wikipedia, “…during the 19th century, the Rothschild family possessed the largest private fortune in the world… the name of Rothschild became synonymous with extravagance and great wealth…” And from Forbes, “Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.” He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon. But that’s not the whole story. The original quote is believed to be “Buy when there’s blood in the streets, even if the blood is your own.”

What would Jeremy Siegel do?

It was in the mid-1990s that I read Stocks for the Long Run, by Jeremy Siegel. Professor Siegel earned a PhD from MIT after studying under Paul Samuelson and Robert Solow, each a Nobel Prize winner in the field of economics.

Following are excerpts from Professor Siegel’s interview on CNBC earlier this week.

“Investors who buy now won’t be sorry a year from now…We’ve had bigger shocks in the past…There may be another 5%, who knows, there may be another 10%, but that means for me, moving forward, that just raises the return on the market looking forward…If you got cash, begin to employ it. You won’t be sorry a year from now…Through history, the S&P has beat the CPI by 4 to 5% a year…There may be downside… but let me guarantee you when this is over, the S&P will jump ahead of what the consumer price index is. That’s always the way it’s been historically.”

What would Warren Buffett do?

What would one of the most successful investors of our time be doing now? I reported on Warren Buffet’s strategy in a recent blog post. The link below will take you there.

What would Warren Buffett do? – Financial Planning Associates, Inc. | Carl Goodin, CFP (fpai.net)

So, is it ever a good idea to “stop the bleeding”? Yes, if more bleeding would screw up your plan.

Last weekend Jayne and I enjoyed spending time at the Lake of the Ozarks with Jayne’s sister and her husband. They own a nice home on the lake and a nice boat dock with two nice boats. One of Steve’s boats is quite large, powered by two large V-8 engines. While we were there some friends “drove” up to the dock in their very large cabin cruiser – 3 bedrooms, 2 baths, showers, kitchen, etc., etc. Afterwards we were speculating about the cost to feed the cruiser’s large diesel engines, especially since the price for a gallon has increased lately. In the end Steve stated some boating wisdom, “If you can’t afford the gas you shouldn’t buy the boat.”

And now for some financial wisdom: If you can’t afford to endure a market downturn you shouldn’t own stocks. It should be noted that with boating and investing there is, of course an upside. If you can afford the fuel (and the boat) you can experience the pleasures associated with boating. And, if you can endure market downturns you can reap the profits associated with owning equities over time.

How do you know if you can endure market downturns?

You assess your capacity for tolerating market risk. You study your cash flows under various scenarios. We meet with our personal financial planning clients annually to evaluate their risk capacity. The application of our education, experience and planning tools allows our clients to be confident in their investment strategies. Market downturns are expected and planned for.

Best always,

Carl

PS. If you have any questions or concerns, don’t hesitate to schedule some time with me.

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