Time To Buy Stocks?

The second quarter was a bad one for stock investors. The Dow Jones Industrial Average was down 10%. Any big movement — even a dismal slide — does bring one opportunity: the chance to sell some investment high, buy others low. In other words, reblance. In a CBS MoneyWatch segment this morning, Jill Schelssinger, calls this the silver lining of the market’s bad, bad quarter. (Below.)

Buying after a double digit drop sends a shiver up the back of even the steeliest of the sturdy. All kinds of academic research has shown we love to hang on to our winners, and drop the losers.

That’s a costly habit. Research firm DALBAR, Inc. found that a $10,000 investment consistently kept in the market from January 1980 to December 2006 would have grown to $286,000. But if you had been out of the market on just the 10 best performing days you would have earned only $131,000.

Given how the market’s been moving lately, it’s most likely bonds have crept up to become a larger part of your holdings, while equities have probably pulled back. The danger of that is that you miss out on the chance at portfolio growth that equities have generally provided. Unfortunately 2009 is missing, but one thing that the data does show: one year’s performance has no bearing at all on next year’s.

Here’s an interesting table pulled from Fidelity’s website, but attributed to Strategic Advisors.

Popular Styles: One Year’s Low Performer Could Be Another Year’s Top
Note that differing market environments can bring varying results to asset styles
2002 2003 2004 2005 2006 2007 2008
Large stocks -22.1% 28.7% 10.9% 4.9% 15.8% 5.5% -37.0%
Small stocks -15.7% 39.2% 20.7%* 14.0%* 26.9%* 11.6%* -43.1%
Foreign stocks -20.5% 47.3%* 18.3% 4.6% 18.4% -1.6% -33.8%
Bonds 10.3%* 4.1% 18.3% 2.4% 4.3% 7.0% 5.2%*
High-yield bonds -1.9% 28.2% 10.9% 2.7% 11.8% 2.2% -26.4%
Short-term investments 1.7% 1.0% 1.2% 3.0% 4.8% 4.7% 1.7%
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