The world economy is a volatile place right now. Even with last week’s recent gains, the stock market is down substantially over the last few weeks and it is down almost 40% on the year. While that is cause for concern for those at or near retirement age, it might actually present a buying opportunity for those who have a longer investment horizon. With my retirement approximately 30 years out, I look at the current market as an opportunity to buy at a big discount.
Why might this be a buying opportunity? Because it is always better to buy low and sell high. If you’re in it for the long run, you have a long time for your shares to gain value. Right now with stocks low across the board, you may be buying shares that will substantially increase in value over time.
A few days ago, Warren Buffet wrote an op-ed piece for the NY Times, Buy American. I Am. If you missed it, I highly recommend reading it. Warren Buffet is one of the world’s most successful investors, and when he talks, people listen. One of his most famous investment quotes is this:
Be fearful when others are greedy, and be greedy when others are fearful.
Right now people are fearful around the world, and with prices discounted as they are, now is the time to be greedy. But don’t be subjected to blind greed. If you choose to invest now, go in with a plan.
Take advantage of this buying opportunity
Don’t worry about market timing. I could stress over the daily fluctuations and fractional changes of each share but I won’t. It is impossible to guess when the market will truly bottom out. And trying to do so is bad for the body, mind, and soul. But it is easy to recognize that almost the entire market is substantially discounted right now. Value averaging is the investment strategy of investing more money when stocks drop in price, and this may be the textbook example of when to do that. These opportunities are few and far between and I plan on taking advantage of this one.
Want Warren’s advice on this one?
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Invest with a plan. Don’t blindly throw money at a stock you know was priced higher a few months ago. Instead, buy based upon your investment goals and maintain a balanced asset allocation. Otherwise you are asking for disaster.
How to take advantage of this buying opportunity
Increase your 401(k) contributions. Adding even as little as 1% can make a difference in the long run, and you probably won’t even notice it in the short term. If you can squeeze more out of your budget, go ahead and try. If it gets tight you can always bring down your contributions later.
Max out your IRA. Your IRA is another great place to stash the extra cash. You can invest up to a combined $5,000 in a Roth or Traditional IRA in 2008. If you haven’t opened an IRA yet, there are several places you can do that, including with your bank or in a brokerage account.
Invest in taxable accounts. If you have already maxed out your retirement accounts, or you think you will need the money before retirement, then consider investing in taxable accounts. I personally have accounts with Vanguard and TradeKing and recommend both of them.
Be responsible with your investments
We may be in this bear market for several months and perhaps more than a year. Don’t invest with money that you need right now. You should only invest with money that you can afford to leave in equities for 5-7 years, if not longer. There are never any guarantees and if you are gambling with rent money, you are asking for disaster. Pay your regular bills – they have a guaranteed return on investment. If you are closer to retirement, consider placing extra funds toward your mortgage, retiring debt, or placing it in safer investments. But if you are young, have a long term investment horizon, and have some extra cash to stash, the current market may just be a golden buying opportunity.