The market turmoil recently has reminded me of what the market was doing in late 2008 and early 2009. People were afraid of their shadows, and it seems things are getting that way again. Now the trouble is in Europe instead of US banks. Last week we had 4 days where the markets either went up or down over 400 points. Today it is back down another 400.
When the market gets like this, I try to go back to Buffett’s famous quote. “Be fearful when others are greedy, and greedy when others are fearful.” Today may or may not be the day to buy stocks, but in general I think this is the atmosphere to buying and not selling stocks. The key is to know why you are buying stocks though. If your goal is to get rich quick, you’re doing it wrong. That’s called gambling, not investing. If you are 25 and your goal is to save money for retirement then I suspect today will be a great day to buy stocks. Tomorrow and the next day would be good as well. Good chance next month will be too. You get the idea.
If you absolutely need to have this money around next month, it’s probably not something you should put in the stock market. If you have a time span of a couple years though, go for it. If you are nearing retirement it is a scary time to invest. That being said, when you are planning to retire you really have to consider your options. Right now, there aren’t any “safe” investments that are paying any kind of real interest. If your money is just sitting in a bank account or CD it might as well be in your mattress.
If you just plan on putting it in an index fund and follow the 4% rule, you might not get the results you were hoping for. The theory is that that will last you for at least 30 year. Well, putting 1 Million in the S&P a decade ago and following the 4% rule would leave you with less than $400,000 right now. Unless things go drastically better the 4% rule won’t work.
This is why I’d suggest going for a retirement based on dividends, rather than withdrawing principal. You can pretty easily get a portfolio with a yield of 4%, and if things get bad (worse than now) you still get to cash your dividend checks. I know that many companies cut their dividends in 2008 and 2009, but many didn’t too. You can’t count on just one company, but if you get a basket of 10 or 20 then one or two bad apples won’t kill you.
Currently, I have a portfolio yielding right around 4% and my top holding (Apple) doesn’t even pay a dividend at all. This shows that it can be done, and with the recent market sell off it is pretty easy to get a great group of companies with a high yield. Look at companies like Walmart, Johnson and Johnson, Pepsi, Coke, Waste Management, Intel, Verizon, General Electric, McDonalds, and Proctor and Gamble. Those companies are all still going to be around in a few years, and right now you can get them with some fabulous yields. My favorite is Intel with an over 4% dividend right now.
The point is, don’t panic. Sure, the economy isn’t as great as some would like it to be, but that could just mean you have a great opportunity to invest in the best companies in the world while they are on sale. Buffett has said they could close the market for the next five years and it wouldn’t effect him at all. The only reason he goes to the market everyday is to see if somebody is doing something dumb. I think some of the yields you can get now qualify. Stop panicing. I’ll check back in 5 years to see if McDonalds is still around.
Disclosure: I currently have positions in AAPL, INTC, and GE, and plan to start positions in some of the other stocks mentioned in the next month or so.