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Tuesday, August 23, 2011

Stay the Course

It has been about a month since the stock market entered "bizarro world".  On July 21, the Dow closed at 12,724 -- close to it's highest point since Lehman Brothers went bankrupt in September of 2008 and almost twice the level of the low point hit in March of 2009.  Yesterday, the Dow closed at 10,854, representing almost a 15% drop since July 21.  However, including this drop, we are still at a net increase of almost 7% for the past year.

Like it or not, it is not at all unprecedented for stock markets to lose or gain 15% over a single month, but it can certainly be unnerving, especially when daily volatility is so high.  We would all be happy to get the 7% return of the past year without all of the volatility, anxiety, euphoria, etc... that has taken place month after month, but it doesn't work that way, and it never has.
Right now, with all of the dour economic news, man
y people are wondering why they should even have any of their money invested in stocks.  Here are links to two good answers from well known and respected finance professors, as well as a quote from each article:

Don't Panic About the Stock Market

"My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world."

 
The Bond Bubble and The Case for Stocks
"Despite the sluggish economy, the corporate sector is churning out record profits and increasing dividend payments. We believe dividend-paying stocks are the answer to a Treasury bond market that looks more dangerous than ever."