[In Pictures: 5 Ways to Measure Investment Risk.]
When it comes to everything else in life, we want a bargain. Retailers put stuff on sale because people tend to buy more when it costs less. When a store raises prices, people tend to buy less; when prices come down, we usually buy more. Firms still make a profit and they sell more product.
Groupon and other sites have allowed people to pinpoint deals at restaurants and stores where they live. Why have these sites become so popular? Because people like getting a deal.
For some reason, stocks are the one thing people don’t tend to buy when prices are low. They’re not enticed by a deal on stocks. So often we see people sell their stocks when prices are down and then buy back in when prices are high.
The Dow Jones Industrial Average started the year at 11,600 and reached a high of 12,800+ in April. Now it’s down to around 10,655. Yet corporate earnings are better than they were at the beginning of the year. With prices down and improved earnings, those stocks are actually a better value now than they were on Jan. 1.
The stock market is offering a coupon for a nice discount, plus it’s throwing in the bonus of improved earnings just for making the purchase. That’s a great buying opportunity. Why do people pass it up? The tendency is to wait until they’re confident the market is going back up. Unfortunately, they don’t have that confidence until after it’s already gone up. They don’t know when it's the right time to buy until after it’s passed them by.
What if you got out of the market and are afraid to get back in? Instead of waiting, contact your investment advisor and develop an approach to get back in the market. You’ll want to have a systematic strategy that takes the guesswork out of it. If prices rise, you get to participate. If prices drop, you'll still have some of your powder dry.
Or, maybe you’re fully invested already. This is an excellent time to adjust your investments, especially if your holdings are sub-par. You might have some underperforming mutual funds you've held for 10 or 15 years. You may not know if they’re doing well or poorly, or you’re not getting any advice on what you should own. Think about making a change if funds have done poorly against their peers for five years or more.
In addition, you can raise contribution amounts to your retirement accounts (IRA, 401(k), etc.) to purchase more shares at these discounted prices. And this is an excellent time to rebalance or realign your investments.
One thing to remember: When you invest, it takes time to realize what a good deal you’re getting. You won’t feel the same kind of instant gratification as you do from finding a good sale or a deal on Groupon. It might take a month or a year. It might take a couple of years. But I believe that if you buy stocks at today’s levels, one day you’re going to be very happy you did.
Adam Bold is the founder of The Mutual Fund Store, which provides fee-only investment advice with locations coast to coast. He's also host of The Mutual Fund Show, a call-in radio program broadcast across the country. Bold is author of the book The Bold Truth about Investing (April 2009). Bold is Chief Investment Officer of The Mutual Fund Research Center, an SEC-registered investment adviser, which provides mutual fund and asset allocation recommendations, and research to stores in The Mutual Fund Store system.