October 9, 2008

Should I Continue To Invest In The Stock Market?

Where ever you look, people are debating whether last Monday’s S&P 500 plunge of 8.8% combined with yesterday’s 8.3%

loss at the lows and 3.8% loss at the close is the capitulation we need to call a bottom. Was the last-hour recovery

yesterday a sign that the tide has turned?

Here’s a round up:

Mark Hulbert: “It’s worth remembering a truism about market psychology that has been too often overlooked in recent

weeks: When genuine capitulation finally takes place, few will recognize it as such at the time. In contrast, an

eagerness to declare that capitulation has occurred probably means that it hasn’t.”
Bill Cara: “Equity markets complete their Bull and Bear cycles with increased volatility, which is the case today.

Bull cycles end when the actors run out of cash needed to push prices higher. Bear cycles end because cash holdings

build up to very high levels amid the growing opportunities to buy value.

I think we will do better from here on, and that by far the worst is behind us. I think the credit panic ended with

the collapse of Bear Stearns, and credit spreads are already much improved since then. If spreads continue to come

in, the write-offs at the big financials will end, and we may even have some write-ups in the second half instead of

write-downs.

Valuations are attractive, and valuation spreads are now about one standard deviation above normal, a point at which

valuation-based strategies usually begin to work again, and momentum begins to fade (there is no evidence of the

latter yet, as the old leaders continue to lead).

Most housing Stocks are up double digits this year despite dismal headlines, a sign the market had already priced in

the current malaise. I think likewise we have seen the bottom in financials and consumer Stocks, but not necessarily

the bottom in headlines about the woes in those sectors. Although the economy is likely to struggle as it did in the

early 1990s, the market can move higher, as it did back then.

There’s no need to panic as we have seen it all before! However, if you need your money within the next five years

then you will be well adviced to take your money out of the stock market. If you have more than 10 years before you

retire then you need to keep investing in the stock market. The worst mistake you can ever make right now is to stop

contributing to you 401K plan! You have to keep contributing to your retirement plan as it will help you in the long

run due to the Dollar Cost Averaging theory.

Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at

predetermined intervals and set amounts. Instead of investing assets in a lump sum, the investor works his way into

a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over

several years, providing insulation against changes in market price.

By employing this method of purchasing Stocks and securities, you will be able to buy more securities when the

prices drop and less when the prices rise. Over time, it will average out with the potential to increasing the value

of your potfolio. This is why it is absolutely important to continue to stay in the stock market. A lot of Stocks of

fundamentally sound companies could be purchased at a bargain right now!

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October 11, 2008

Should I Keep Investing In The Stock Market? | Holly Swanson @ 8:57 am (Pingback)

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February 23, 2010

Should I Keep Investing In The Stock Market? :Snap Investing @ 12:06 am (Pingback)

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