How do you know when a falling stock market has finally hit bottom? More importantly, should you even care? If all these highly paid Wall Street analysts are divided over whether weve seen the worst of a bear market, then what is the everyday individual investor supposed to do?
If youre a financial news enthusiast, like I am, all you hear these days is whether or not the market has hit bottom. Plus, if your retirement portfolio is heavily invested in stocks, and most are, theres a peace of mind factor as to whether your dwindling nest egg has finally stopped deflating and has actually started growing again.
Therefore, one basic reason we want to know if the market has hit bottom is so we can sleep better.
Jim Cramer thinks so. In fact, he and a few other analysts say we hit bottom on July 15th. So does analyst Tom Brown at Bankstocks.com who appeared on Henry Blodgetts VLOG (thats a video blog by the way) this week to argue why he thinks we hit bottom a month ago.
Brown says that historically, markets tend to anticipate improvement rather than respond to it. He says that if you wait to see the market go up, you'll miss most of the rally.
One reason they point to July 15th is thats the day the S&P 500 Financials Index hit its low for the year. Since then, that index has risen 22%.
Floyd Norris, who writes for The New York Times, says that one sign that stocks have hit bottom is when you see intense volatility; that usually happens when a market is about to switch direction.
Some analysts claim the best way to determine when to start buying stocks is to keep your eye on the bond market. Thats telling us were not at the bottom yet.
Big bears
Ironically, the biggest bears are the analysts working for financial services firms, whose downgrades play a role in pushing the prices of financial stocks lower. For example, Merrill Lynch analyst Guy Moszkowsky downgraded Bank of America and Morgan Stanley saying the credit crisis is "far from over." Stocks of both companies dropped between seven and five percent on the day of the downgrade.
Merideth Whitney of Oppenheimer, who was featured on the cover of Fortune for accurately predicting the bear market, thinks were only halfway there as far the bottom goes. She may be on to something since the average bear market drops 28% before it starts to go back up, and so far this one has only gone down 23%.
If you listen to arguments like that, you may want to just put your money into a bank CD and wait out the volatility, which is exactly what many investors are doing.
Then, there are those investors who look at markets like this and see opportunity. In fact, according to those investors, taking money out of the market now could be the worst thing you can do. That is because you know that sooner or later its going to recover. And gurus like Cramer think the recovery has already begun.
The key as usual is to have a diversified portfolio so you can spread your risk among several sectors and asset classes. Balance your portfolio among stocks, bonds, cash and maybe some commodities such as oil, natural gas, precious metals and food.
Investment professionals recommend using bear markets to hunt for bargains, especially among global Fortune 500 companies that can continue to have strong earnings even when the economy goes south. These are companies like Coca-Cola, GE, IBM and McDonald's. Not Starbucks, though.
The real question
The Chief Investment Strategist at Wells Capital Management, Jim Paulson, says the question isnt when the market will hit bottom. The question to ask yourself is if you buy a stock today, where will it be two to three years from now?
That way even if the market hasnt hit bottom, and stocks continue to go lower in the next few months, youre still coming in near the lows which is what buying low and selling high is all about.
So follow the one strategy most financial advisors agree on — when it comes to investing, think long-term and leave the market timing to the traders and hedge fund pros.
