So why was last week’s drop different from all other drops this year? Because it was the first time since August that the market had dropped five days in a row. People were getting nervous. The 171-point drop on March 8 is easy to shrug off. It’s a fluke, you say, and the market rose the next day. But five straight drops gives you ursine thoughts.
For those of you lucky enough to have never seen one, a bear market is when stocks go down and down and down, interrupted by only the occasional rise. It starts to feel as if stocks will stay down forever. Our last good growler started in 1974, when I still had hair and was writing about stocks for the first time. Many of today’s money managers were in grade school. Mutual funds were still exotic. Owning stocks then was water torture-prices kept falling drop by drop. It was normal for stocks to sell for seven times annual per-share earnings and carry dividend yields of 5 percent. Today the S&P is at 18 times earnings, the dividend is 2.6 percent.
Back then, it took real courage to buy stocks. Now, in the longest-running bull market ever, it’s taken courage to stay out of the market. Every drop has proven to be a buying opportunity. Many people have come to believe that baby boomers will pour their retirement money into stocks forever, propping up stock prices forever. But investing on this basis is a good way to spend your retirement living on Hamburger Helper and day-old buns. If investing were this easy, how come we haven’t all made billions in the stock market? I remember the way people argued in the 1980s that it didn’t matter what you paid for Japanese stocks, because so much money was chasing them that prices could only rise. Wrongo. When last I looked, Japan’s Nikkei 225 Index was down 45 percent (in yen) from its 1989 high.
Markets, you see, develop lives of their own. Markets are rational in the long run but in the short run, they overreact, both up and down. As traders say on Wall Street, “the trend is your friend.” The market has been chasing itself up since e 1995. One day, the market will start going down. Lord knows, there is no shortage of signals that in the past have indicated trouble. Among them: long-term interest rates are up, which tends to be very bad for stocks, and some commodities prices seem to presage inflation, which could prompt the Federal Reserve Board to raise short-term rates. Not to mention the Yahoo! idiocy, where a stock of questionable value comes out at $13 on Friday, soars to $43 and closes at $33.
Does this mean a bear market is coming soon? I don’t know; no one does. What I do know is that unless you’re very good or very lucky, trying to leap nimbly in and out of the market is a fool’s game. It’s as easy to miss the highs as it is to duck the downs. A University of Michigan study commissioned by Towneley Capital Management of New York shows that from 1963 through 1993, missing the 90 best market days would reduce your gains by 95 percent. Each dollar left in the market grew to $24.30 in those 31 years. But if you missed the best 90 days, you had only $2.10. On the other hand, if you missed the 90 worst days, you had $326.40. And if garbage trucks had wings, they’d be pigeons.
What should you do? Depends on your tolerance for risk, and your age. I’ve got a strong stomach and 14 years before I’m 65. I’m staying invested, figuring to grin and bear it. But the market is up 39 percent since the start of last year, which makes it much riskier than it was. In other words: if you can’t afford a 20 or 30 percent loss, you might want to take some of your winnings off the table.
