Monday, October 6, 2008

Don't Panic: Stay the Course

In past stock market declines, many people sold stock near the bottom, thereby missing the larger recovery that, heretofore at least, has always occurred. 

No one can accurately predict the stock market's bottom or whether it will recover more than it has lost, but I personally would rather bet on humankind than against it.  

So, I will continue to invest in the stock market without trying to time it:  Whenever my checking account has five thousand dollars more in it than I need, I invest that in Vanguard Total Stock Market ETF, which offers broad stock diversification at an extremely low fee--0.07% plus the rock-bottom $4-per-trade commission charged by Sharebuilder. 

That approach to investing means that over time, I end up owning more shares bought when prices are low than when they're high. And I don't have the stress of trying to do what even most professional investors can't do: time the market and pick individual stocks that will beat the market.

Of course, before investing, everyone should have at least a few months worth of cash reserves in a money market account to allow for emergencies. 

I want to be clear: I am not a professional financial advisor, and your individual situation may warrant a different investment strategy than mine, for example, if you need to insulate your money against wide short-term swings. So, it's typically wise to consult a trusted financial advisor, perhaps showing this blog post to him or her.


Cornhusker said...

Another good selection is Berkshire Hathaway…the B stock if you can afford it. ($4,390)
The diversified nature of the stock makes it similar to a mutual fund. Of course, you can't argue with the individual who runs Berkshire.

Anonymous said...

Marty, that fund you're recommending is a dog. I just did a quick look, and since it's inception it's broken even. It's nowhere near keeping up with inflation.

The Berkshire B is quite good, if the goal is an investment when you put together 5k, and then to hold.

and add VTI in to compare the Vanguard fund against it.

Personally, as the bailout failed the first time through I was in the process of moving my assets to a mix of fixed return investments and funds that emphasize the overseas markets.

I think that people need to pay attention to timing when investing outside the US (most of the money in that fund was put aside 3-6 years ago) but should bear in mind that the nice thing about investing outside the US is that even if the companies are sloppily managed, since the currencies they trade in are not dollar currencies, the companies will continue to do well against US companies for the same quality of leadership until the dollar stops eroding.

What amused me a great deal is that my money is invested as it is specifically because I am not interested in rewarding the US further for what I consider a poor record shared out between business and government. I pay my income tax, and I pay my social security - and after that, I've discharged my social obligation and will move my personal funds as I see fit.

Another citizen you may have heard about has a similarly invested mix, perhaps for different reasons. But you'd need to ask him.

His name? Dick "Red" Cheney.

Welcome to the Revolution, Comrade Dick!

Marty Nemko said...

It is my belief that it is impossible for 99% of investors to beat the market, and that even Berkshire Hathaway, run by 78-year old Warren Buffett and 84-year-old Charlie Munger, are unlikely to, moving forward, make more profitable stock picks than will the collective wisdom of the market.

Sure, the total market as reflected in Vanguard Total Market ETF has not done well in recent years. But
I agree with former Vanguard head John Bogle who says that in the end, the wisest investment approach is to use a dollar-cost average into low-cost diversified, low-turnover funds such as Vanguard index funds and ETFs.

The reason I invest in an index fund that includes US stocks is that US companies do a great deal of investing overseas, and US companies have had the most experience in developing efficient means of running companies.

But you would get no argument from me if you chose to invest in an index fund that did not include US companies, for example, Vanguard FTSE All-World ex-US Index Fund Investor Shares (VFWIX.

Anonymous said...

I just heard a talk show host compare the recent market to a scene in "It's a Wonderful Life." It's the scene when George Bailey is about to go on his honeymoon, then stops when he sees a commotion at his savings & loan.

George's uncle Billy was compared to one side of the average American, who was careless and made an honest mistake. The panicky customers were compared to another side of the average American, thinking of saving only themselves, even if at a steep cost.

Mr. Potter was compared to the corrupt politician, calmly seizing power at every opportunity. The police sirens were compared to constant alarm leading people to panic. And George was compared to the increasingly rare person that remembers not to panic.

Interesting, I thought. But there was one thing the host didn't say: before long, even George forgot how wonderful his life was.

I hope the rest of us don't forget and don't panic.


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