Note to Editors: Vickie Bajtelsmit is a finance professor in the Colorado State University College of Business and the author of three personal finance books.
When I was younger, I loved roller coasters–the wilder the ride, the better. But as I got older, they lost their charm. I found myself feeling queasy from the heights and no longer enjoying the feeling of leaving my stomach behind after a sudden drop.
The last few weeks have felt like a roller coaster ride in the stock market. Admittedly, it’s been mostly downhill, with little uphill teases, giving just enough height to plunge us down again. Although I’ve been feeling queasy from the ride, I’m not getting off. And you shouldn’t either. In fact, smart investors know that when the ride is at the bottom, it’s time to get on, not off.
To give a different analogy, buying stocks today is kind of like finding that your favorite department store is having a "50 percent off everything" sale.
As I write this column, the Dow sits at around 9,000, more than 10 percent above its recent low point, but still 35 percent lower than about a year ago. Investment portfolios of households and businesses are reeling from the steep losses and investor confidence is extremely low.
The kneejerk reaction for many investors in this kind of uncertain economic climate is to get off the roller coaster. In fact, the "flight to quality" out of stock mutual funds and into perceived safer investments has actually exacerbated the downturn in the markets. Mutual fund managers, when faced with withdrawal requests from investors, must liquidate holdings in order to move the funds. If more people want to sell stocks than to buy them, it causes the prices to fall.
The bad news for any of you who chose to get off the roller coaster during the downhill plunge is that you took steep losses to do so. Normally, the rule of thumb in investing is to "Buy low and sell high." If you sold recently, you probably did the opposite, bought high and sold low.
If you follow the financial news, you know that there has been much talk of whether we have hit the bottom. The optimists think we are there, or nearly there. The pessimists are talking about prolonged recession and have even been using the "D" word.
So which should you believe? The truth is that it doesn’t really matter whether we’re at the bottom or not. The important thing is that the underlying structure is relatively sound. Most of the companies that are selling for bargain prices are going to be around for the long haul, so there’s very low risk of falling off the tracks completely.
My advice is to tighten your seat belt and stay on for the ride. Whether it’s a short or long distance to the bottom, I’m positive that there will be a bottom. And then we’ll be headed up again.
As with roller coasters, there’s usually that final big plunge before you get to the end. In contrast to a thrill ride, where we finally can get off with wobbly legs, the bottom of the market decline marks a point where all the smart money will pour back into stocks. If you stay on the roller coaster, you’ll get to ride it back up again.
If you have a tendency to get queasy like I do, just close your eyes and don’t peek.