Over the last six trading days, the S&P 500 index has dropped by almost 8%. The last 7 months have certainly been disastrous for investors, and many would argue that we haven’t seen the worst. With no end in sight to the European economic mess and anemic US growth, many stock prognosticators are calling for gloom and doom in the markets.
Chief ‘gloom and doomer’ Paul Farrell of Marketwatch.com says:
So don’t kid yourself folks, recent economic and market “ugliness and violence” not only won’t end soon, it’ll get meaner and meaner for years after 2012 elections … no matter who wins. Only a fool would believe that a new bull market will take off in 2013. Ain’t going to happen. That’s a Wall Street fantasy. Fall for that, and you’re delusional.
I don’t want to get into it with Mr. Farrell though I tend to almost always disagree with him, but for current retirees or for those investors fast approaching retirement, attention should be paid to his prediction and portfolios should be adjusted accordingly.
Young and the Restless
This column is not for the retirement crowd. It’s for those in their 30-40’s who have delayed planning for their retirement. And for them I say that their procrastination has the potential to be very profitable. What’s the old phrase; ‘It’s better to be lucky than good’? Well nothing could be truer for those who have delayed investing for the future. While markets may continue to drop, if you can invest in good, profitable companies or countries with strong economic fundamentals, and get them at a 20-30% discount, you are way ahead of the game.
Well what about Farrell you ask? Isn’t it true that the world doesn’t look so good economically right now? Well if you look at some recent data, things actually seem to be getting better. I am not saying that ‘happy days are here again’ but the sky isn’t falling.
Keep in mind that it wasn’t too long ago that everyone was predicting a double-dip recession. According to Daniel Gross at Yahoo Finance:
Take the broadest measure: GDP. After growing at a .4 percent annual rate in the first quarter and a 1.3 percent annual rate in the second quarter, the Commerce Department today gave its second answer on third quarter growth: 2.0 percent. That’s a downward revision from the previously reported figure, but it still represents a rising pace of growth — not a setting one. Macroeconomic Advisers, which provides real-time estimates of GDP growth, says the economy is growing at a 3.2 percent rate thus far in the fourth quarter.
Add to the mix September’s record exports, rising retail sales and a real estate market that appears to have bottomed, and maybe--just maybe--there is some light at the end of the tunnel.
For younger investors this could be a great time to invest. Keep in mind that things could stay volatile for a while, and just because stocks are cheap doesn’t mean that they can’t get even cheaper, but for those with a long-term horizon, the risk may very well be worth the reward.
What to Do?
As I have mentioned many times there is no such thing as ‘one size fits all’ investing. Even young investors need to define goals and needs and invest accordingly. That being said, a portfolio that features both dividend producing stocks as well as a significant international exposure is a good approach. Stocks like Intel (NASDAQ:INTC) which has amazingly actually appreciated this year, Johnson and Johnson (NYSE:JNJ), Honeywell (NYSE:HON) all fit the bill of solid companies with solid dividends above 3%. Brazil (NYSEARCA:EWZ) which is about to become the world’s 6th largest economy, has dropped 30% this year and with continued strong economic fundamentals looks like a potentially good investment.
I am not recommending running out and buy these specific issues, rather these are ideas and should be researched and analyzed how they fit into your financial profile. Steep market drops have historically provided investors with the courage to invest in great long-term opportunities. For those thinking about long-term investing, now may be the time to act.