The Best Buying Opportunity in History?
As many of my clients and readers already know, life as a money manager has been immensely stressful over the past few months. It isn’t that my clients have lost an amount of money beyond recovery, or that my business model has failed: it’s more a feeling of defeat not just as an investor in the market but as a passionate advocate of the free market system. However, I try to push my emotions aside and think beyond the next 30 days: money gets made during times like these. I can bring true value to my clients, friends, and family if I can get them to see the big picture. And at this point it seems this may be a very good opportunity to buy.
We could start justifying this advice from a historical standpoint, pointing out all the other precipitous drops in the major indexes and the amount of time which it took for us to recover. Think 9/11, the ’87 crash, even the Great Depression: while the memories are scary, the correct financial move in each case would be to deposit cash back into the market in the weeks and months following the big declines. Using this method will lower the average purchase cost for each security and increase your returns when the market recovers. It’s the sort of simple strategy which smart people often forget to implement.
In this recent drop, it has been particularly hard to pick an entry date for starting the process of averaging money back into the market. Stocks have dropped in value so far so fast that many people are tempted to sit on the sidelines for a couple of months and wait. The thought process is, even if one isn’t invested during the first couple weeks of a rebound, they are better off missing some upside than experiencing further declines. It’s the same theory which applies to gambling losses causing more emotional pain than gambling winning causing emotional joy. The only problem is, in a market like this, moves of 500+ points happen all the time. Sitting on the sidelines for a month could possibly mean a swing of several thousand points in the Dow Jones.
Today’s post was inspired by my friend Jeremy over at Generation X Finance. He blogs primarily to an audience in their 20’s, 30’s, and 40’s and insists that ‘friends don’t let friends bail out of the market.’ It’s our duty as financial professionals to help people make prudent moves. The idea of pulling money out of the market at the very bottom is not being prudent. It’s being emotional. Putting money into the market on days when stocks move down may be the more prudent move.
Russell Bailyn
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Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
Comments
I think we have one fundamental difference between the 1929 crash and current conditions; the bail out. We may not have anything positive to look at for the stock market any time soon as far as numbers go. I just don't see how we can throw $3 trillion between the U.S. and Europe and have no positive results. The major difference between 1929 and now is that in '29 the problem was caused by the issuance of millions of dollars in worthless stock from unscrupulous people looking to screw investors. Now it was the issuance of Trillions in worthless debt. The debt markets are enormous compared to the stock market. In ’29 the problem caused over a 90% drop in the stock market and it took about 24 years to come back. Today’s mess has caused a drop of about 40% not nearly the percentage of the ’29 crash. Then the government controlled about 3% of GDP and now they control about 20%. They should be able to steer us through this mess if they don’t let politics get in the way.
Posted by: Investment University | October 31, 2008 01:04 PM
There isn't really a best time to buy as you won't know when the prices of the shares have bottom, so when you have calculated the value of the company and know that the price now is definitely lower than expected, then you are buying at a discounted price. The price may still drop further, that is the reason why its always advise not to buy the shares at one go but buy when it go lower to average out.
Posted by: Sam | December 6, 2008 11:25 AM