Wednesday, November 12, 2008

Stocks - Is it Time to Buy or Sell?

To say it has a horrific year for stock market investors would be an understatement. At the end of October, the Dow was down 28.18%, the S&P was down 32.84% and the Nasdaq was down 32.84%. It would have been worse if it weren't for a rally of about 10-11% during the last week of October.

The case for buying is made by Stocks look cheap worldwide makes a case for investing since P/E ratios are close the those of the 70s, when valuations of stocks were cheap. On the other hand, an article in Yahoo! Finance predicts that the financial crisis will worsen with an upcoming "bloodbath in the hedge funds."

Is Now the Time to Buy Stocks? by John Cochrane in today's Wall Street Journal provides a balanced approach to considering this question. Mr. Cochrane uses dividend/price data and volatility analysis and concludes whether to buy, sell or hold depends on an investor's situation.

"If you're less leveraged, less affected by recessions, and have a longer horizon than the average, it makes sense to buy. If you're more leveraged, more affected by recession or have a shorter horizon, it might be the time to sell, even though you might be cashing out at the bottom. If you're about the same as everyone else, do nothing and relax."

I interpret his conclusions as follows:

  1. For cash I don't need for 5-10 years, consider buying stocks.
  2. If I need more cash now, sell stocks, even at a loss.
  3. If neither #1 or #2 apply, maintain the funds currently invested in stocks and wait out the recession.

This seems like a good set of principles to immediately incorporate into our stock investment strategies.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

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