A radio producer called me this week, wanting to set up an interview. His question: “If people are afraid of the stock market, where should they put their money?”
My answer: If you run your money by fear today and joy tomorrow, you’re destined to be a loser. Investors who try to time the market can never be sure when to buy or sell.
Say that you sell, the market drops and you feel like a genius. To profit, however, you’ll have to rebuy in time for the following upturn, which is incredibly hard to do. In a typical bear market, stocks rise a little and then drop, rise again, then drop some more, over and over again. You’re suckered into investing at what looks like a bottom, then the market sinks further.
The upswing, when it comes, will start as a series of sudden, amazing spurts in price in just a few days or a few weeks, at most. At first, they’ll look like just another phony rise.
The average investor who’s scared of the market’s dips today will almost certainly put off rebuying if stocks keep zigzagging down. When you finally get up your nerve, the market may have leaped again.
All this assumes a bear market or serious correction is upon us. That assumption may be wrong, although we cannot know it now.
So to answer the radio producer’s question, you should put your money into investments directed toward your long-term goals and leave it there. Nothing is more important than your time horizon.
To show you what that means, I asked the money-management firm Ibbotson Associates of Chicago to tell me how long it takes to break even after a drop in the market of 15 percent or more, as measured by Standard & Poor’s 500-stock average. There have been eight such drops since World War II.
Ibbotson’s study assumes that you bought these stocks at a price peak, held through each decline, reinvested all dividends and waited until you got your original investment back. All calculations are pretax.
To break even would take you an average of about 22 months–just less than two years. The longest wait was 43 months–about 3 1/2 years, after the bad bear market of 1972-74.
If you held intermediate-term government bonds, you’d have faced just three serious declines and recouped your money in an average of 17 months. The longest was 25 months, starting in 1958.
Applying that data to real life, you can probably feel safe holding blue-chip stocks, through thick and thin, if you won’t touch the money for four years or more. Small stocks and international stocks are more volatile. For them, you need longer holding periods.
But if you’re going to need your money in less than four years–for current expenses, college tuition or a down payment on a home–you don’t belong in the stock market at any time. Sell immediately and put the money in the bank or a money-market mutual fund. You don’t have a long enough holding period to recoup an unexpected loss.
You can hold bond funds, however, if you won’t touch the money for two years or more.
For a free booklet on bear markets, how to handle them, and appropriate risks for different ages and temperaments, call the Vanguard Group of mutual funds at 800-257-9998.
This obsession with switching in and out of mutual funds flies in the face of what mutual funds do best. They were originally designed as diversified investments that you can buy and hold.
In the 1960s and ’70s, shares of stock-owning funds were held an average of 11 years, according to Vanguard Chairman John Bogle. In the ’90s, that period has dropped to about three years.
Bogle likes to quote the legendary investor and billionaire, Warren Buffett, who said that when it comes to stocks, “inactivity strikes us as intelligent behavior.” That seems pretty smart to me.
