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Be assured that the bull will run again
Now is the time for wise investors to take calculated risks. The risk-reward ratio has not changed.
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In our current stock market, with no obvious rhyme or reason why stocks go up or down, investors are hearing from various news sources that to invest in equities is “risky.” The risk-reward ratio has not changed. An investor must assume some risk in order to earn more reward. But the wise investor takes calculated risks.
Whatever you decide to do about the current reduced value of your portfolio, your cure will possibly involve owning some equities. Your portfolio will also assume some risk. Bonds assume the risk of interest rates moving against you. Certificates of deposit also assume the interest rate risk. While CDs will pay your full principal at maturity plus interest, the funds are not available until maturity. Bonds will also pay your full principal plus interest at maturity, but their price fluctuates on a daily basis.
Exploit market volatility
Risk and volatility in the market is a good thing. Ownership of growing companies, including ownership of stock in those companies, is our best means to acquire wealth in the United States today. A volatile market could be an excellent place to find bargains on quality companies. It is a basic truth of money management; when the market is extremely volatile, more stocks might be mispriced. Market panic has sent the valuation of many of our very best companies crashing to unjustifiably low levels.
Value-minded investors could use this volatility in today’s markets to purchase name-brand companies that may have been beyond their price range only a few short years ago. These companies may have an excellent outlook for returning over the years to higher stock prices once again. Isn’t that worth the short-term volatility and price fluctuation of today?
However, the value-minded investor must beware. Many stocks look cheap on the basis of how much their share price has fallen. Some firms are staggering under major debt. Other companies have no profits and little hope of earning a profit. Carefully screen those stocks you choose to purchase. Past performance cannot guarantee future returns.
Favorite companies
My favorite companies make products that are easy to understand and enjoy a broad base of loyal customers. Stick with companies that are currently profitable. If a firm can earn profits during a downturn in the economy, they should do even better after the recovery. Stick to firms with investment-grade debt. Hold stocks with a market capitalization of more than $500 million because those stocks are less likely to be dropped from indexes or Wall Street coverage.
Concentrate on sectors that should do well over the long term. Generic pharmaceuticals, for example, should continue to be strong due to an aging population in need of medications. Health care equipment companies such as Lincare (home oxygen generators) might do well. Long-term smokers will certainly need oxygen as they grow older. Exercise equipment companies like Nautilus have growing market acceptance among consumers of all age groups. Nautilus makes Schwinn and Bowflex products as well as physical therapy and health club equipment.
Purchase the best companies in those sectors that you determine are destined for growth. Possibly, buy the two or three strongest financial firms, or the two or three leading food and beverage stocks.
For the investor with a long-term prospective, this time of volatility can be a blessing. Five to 10 years from now, those investors will own a portfolio that only a few years ago during the “good times” they could never have managed to acquire.
It is especially nice to imagine what this volatility allows the calm investor to provide for children and grandchildren with 20 or 30 years until retirement. Remember that the bull will once again take possession of our markets. The long-term investor can prepare for that bull now.