The stock market is having a correction. A month ago the Dow fell 1,000 points in day before recovering most of the loss at the close. Last Friday the S&P 500 index closed at a lower level than the lowest point reached during the so-called "flash crash."
Whenever the stock market gets a hiccup, there are always two schools of thought. Some worry a crash lies ahead. Some say it’s a buying opportunity. Fear and greed have been living with the stock market forever.
What should an investor do? If you believe a crash lies ahead, you should get out of the market, let it crash and get back in at a lower point. If you believe it’s a buying opportunity, you should buy more when stocks are on sale. If you believe neither or if you don’t know, you keep doing what you always do. Investing would be really easy if you know which way the market will go.
Because I’m still working and saving and investing, I tend to look for buying opportunities. I reason because I have to buy sooner or later anyway, I might as well buy ahead of schedule if prices are low. The overbalancing strategy I created for myself in 2008 worked well in the end although it felt like throwing money into a black hole in early 2009.
Is it a buying opportunity now? I looked at the prices of some ETFs that track the major asset classes.
|Asset Class / ETF||Price Change from Most Recent High||Price Last Seen In|
|US Large Cap: VV||-12%||Feb. 2010|
|US Small Cap: VB||-15%||Feb. 2010|
|US REIT: VNQ||-14%||Mar. 2010|
|Int’l Developed Markets: VEA||-19%||July 2009|
|Emerging Markets: VWO||-15%||Feb. 2010|
Prices for international developed markets rolled back to the July 2009 level. I have bought some more.
Prices for the other asset classes only went back to levels last seen three or four months ago. I don’t remember much excitement about a buying opportunity at that time. So I don’t think they are low enough yet for me to do something out of the ordinary. To reach the July 2009 level like international stocks did, the US stocks will have to drop another 20%.
Is it the start of another crash? I don’t know. I wouldn’t mind having prices go back to March 2009 lows. That would be a buying an opportunity.
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One could argue that U.S. stocks are nearly at the same level as 10 yrs ago. So they are cheap. Hence buy a lot. Looking at past returns to evaluate present value is dangerous. This is not same as risky.
Harry Sit says
KD – Don’t we all know the prices 10 years ago were in a bubble? Same as a bubble top sure isn’t a buying opportunity. In this post I only tabulated how close the prices are relative to a recent market bottom.
I agree with you. The reason I made that argument is that there is no way to know the future. Just looking at the numbers is like ignoring the reality that constitutes them. Who knows, with the austerity measures in UK and other countries in Europe, the -19% may the tip of the iceberg of a massive drop. Moreover, GDP growth rates do not correlate exactly with stock market movements.
Also, a second visit to March 2009 levels would certainly imply even higher unemployment rate than current. Unless one works in public sector, one’s job may well be gone. So it may not be such a good idea for stocks to fall that low again in such a short time.
I don’t know enough stock market history. But has there been a period of falling unemployment and a falling stock market?