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Jonathan Burton's Life Savings
May 7, 2010, 10:28 p.m. EDT · Recommend (3) · Post:
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By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) -- The stock market's gyrations over the past few days look a lot like the turmoil seen in 2008 and early 2009, and no one wants to suffer that again.
Friday's 140-point loss for the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 10,380, -139.89, -1.33%) was something of a relief after Thursday's traumatic trading. At one point on Thursday afternoon the Dow had plunged 992 points -- the biggest intraday point-drop in its history -- before ending the day down 348 points, or 3.2%. But the real and troubling mystery was why, in one brief but harrowing stretch, some popular stocks and exchange-traded funds were being priced in pennies.
Financial advisers have long told investors to put a chunk of their portfolio in foreign stocks, and for the past few years that's been good advice. But no longer. MarketWatch's Money & Investing Editor Jonathan Burton reports.
The closing bell on Thursday brought more questions than answers about a day that Wall Street veterans hadn't seen since the October 1987 crash. What caused the upheaval? Was it the Greek crisis? A trader's monumental mistake? A computer trading glitch?
It will take time before we know. But while the market recovered on Thursday, many investors didn't. The week ended with the Dow down 5.7% and the Standard & Poor's 500 Index /quotes/comstock/21z!i1:in\x (SPX 1,111, -17.27, -1.53%) off 6.4%, but the damage isn't confined to percentages. Investor confidence has taken yet another hit. People hadn't been doing much stock buying over the past year even as stocks soared. Now they're even less likely to take the risk.
Of course, that might be exactly the wrong move for investors, especially those with long-term goals. But honestly, if Wall Street professionals don't have a handle on stocks, how can the rest of us? These questions and answers offer some advice:
Stocks plunged on Thursday and nobody has yet figured out why. How can investors be confident that markets will function in an orderly way?
It's surprising and more than a little unnerving that the New York Stock Exchange and other established trading platforms seem to be at the mercy of the same technology that keeps pricing transparent and efficient. But computer-programmed trading is a fact of investing life, and the rapid action exacerbates the systemic, market risk that all investors shoulder. Understandably, such a new and unpredictable risk makes many investors shudder. See story on investor reaction to market's swings.
Certainly, no one minds volatility when stocks are going up. While stocks lost more ground on Friday, the good news is that trading activity was normalized. Moreover, regulators and exchanges are investigating Thursday's mishap and will try to ensure it doesn't happen again. Expect to see provisions for maintaining liquidity and ensuring a fair and orderly market as part of any financial reform legislation. See story on trading glitches prompting talk of reform.
Is this the beginning of a U.S. market meltdown like we saw in 2008 and early 2009?
Possibly, but not likely. Going into 2008, the U.S. financial and housing sectors were on the brink of structural failure, but most investors and others ignored the problems. Now the U.S. economy is healthier and continuing to recover, and domestic stocks should reflect that improvement. That said, the Dow is up almost 60% since its March 9, 2009 low, and after such a huge advance the market is more vulnerable to correction.
Greece is the wild card. The euro zone crisis could end with Greece, or that country could be the tip of a giant iceberg, as subprime mortgages were to U.S. financial markets at the outset of the credit crisis.
No doubt global stock markets will feel powerful waves from Greece for many weeks and months to come. The U.S. Treasury market and the dollar could both benefit from a global flight to quality. U.S. stocks, maybe less so. Writing in the Financial Times on Friday, Mohamed El-Erian, the chief executive of bond powerhouse Pimco, said the Greek crisis will weaken the global recovery and prompt investors to seek "safe government bonds over equities."
I'm investing for retirement. Does this week's downturn affect my strategy?
It shouldn't -- as long as your portfolio reflects your risk tolerance. People who stuck to their plan have fared much better over the past 14 months than those who panicked and sold at the March 2009 bottom, but those folks probably also had an appropriate amount of risk.
You can be sure that attractive global investment opportunities will emerge from this downturn. You want to buy when everyone else is selling and sell when everyone else is buying. For now, if you have a year's worth of cash set aside then you won't have to sell stocks either out of fear or need. And cash you plan to use within five years shouldn't be in stocks anyway.
Is there a way that volatility helps me?
Yes, if you're a buyer, the U.S. market is now almost 10% cheaper. You can take advantage of the dips, and one of the best strategies for that is to dollar-cost average into a stock or index by adding a set amount of cash every week or month. Or you could let professional mutual-fund managers do the work for you; the best of them will use this correction as an opportunity to add to positions or scoop up shares of companies that had been too pricey.
What should I do now?
Review your stock and bond portfolio. Are you still on track to your goals? If you need to shift allocations on the margin, go ahead, but don't make any wholesale moves out of haste. Instead, add alternative types of investments that cushion the blow when stocks or bonds get slammed; consider asset-allocation products or gold and other precious-metals products or funds and ETFs that are designed to rise when markets fall.
Just remember that markets are resilient, but panicky decisions are not.
Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.
Jonathan Burton is the investing editor for MarketWatch and covers investing strategies and mutual fund-related news from San Francisco. He also writes the "Life Savings" column. Previously he held contributing editor positions at Bloomberg Personal Finance, Mutual Funds and Individual Investor magazines, and was a reporter with the Far Eastern Economic Review and Investor's Business Daily. He is also the author of two books on investing.
The Washington Post Co.'s announcement this week, that it was exploring a sale of Newsweek, should send tremors through the corporation's flagship property.
10:51 a.m. May 7, 2010 | Comments: 4
- DavidRicardo | 6:05 p.m. May 7, 2010
"what to do about the market's selloff: http://www.marketwatch.com/story/what-you-should-do-about-markets-selloff-2010-05-07" 6:28 p.m. EDT, May 7, 2010 from MKTWBurton
"Don't leave home: www.marketwatch.com/video/asset/this-week-in-mutual-funds-dont-leave-home-2010-05-06/68DDC4C1-70E8-4D5C-8545-40B4C1F0FB42" 1:25 a.m. EDT, May 7, 2010 from MKTWBurton
"Squeeze juicy dividends from top stocks: http://www.marketwatch.com/story/the-dividend-strategies-that-best-juice-returns-2010-04-30" 7:46 p.m. EDT, April 30, 2010 from MKTWBurton
"Tap retirement savings penalty-free? Here's how: http://www.marketwatch.com/story/tap-retirement-savings-early-without-penalty-2010-04-28" 11:38 a.m. EDT, April 28, 2010 from MKTWBurton
"Bigger is better --The case against small caps: http://www.marketwatch.com/story/the-case-against-buying-small-cap-stocks-now-2010-04-23" 7:47 p.m. EDT, April 23, 2010 from MKTWBurton
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