On days (and in weeks) like this one, it's hard for average investors to hold on as they watch the value of their stocks sink under what seems like an endless onslaught of scary headlines.
Most still should, according to stock guru Jeremy Siegel and other experts from the Wharton business school.
The whole thing is worth a read, but here are some highlights:
Stocks are still the best bet for long-term investors, offering better returns than bonds or cash, says Wharton finance professor Jeremy Siegel. But with all the turmoil in the financial services industry, he's not betting on quick gains in the S&P 500. "I don't think it will be up this year," he says, adding, however, that the market "is searching for a bottom. All we need is a few weeks of calm to return and I think we will have a very good base for a rally in the market."
Much of the damage to the S&P 500 can be traced to financial stocks. If one were to remove them from the list, then the ratio between share prices and corporate earnings would be a healthy 14 to 1—less than half the level reached during the stock bubble early in the decade. He calls those levels "really very reasonable."
"Nine of the 10 [S&P 500] sectors have higher earnings to date in 2008 than they had in 2007," Siegel says. Moreover, the international economic slowdown has caused prices of oil and many other commodities to fall, reducing the risk of serious inflation. "I really don't' think that's a concern anymore, and that's really important."
Small Investors Should Sit Tight
As in most crises, small investors will do better sticking with their long-term plan rather than pulling money out in a downturn, says Wharton finance professor Richard Marston, who adds that it's just too hard to spot the market's high and low points except in hindsight. He believes the credit crunch could continue to drive stocks down but that investors who move to the sidelines would risk waiting too long to get back in, missing the rebound.
If one plans a long-term asset allocation of, for example, 60% stocks, 30% bonds and 10% cash, the best strategy is to stick with it through thick and thin, he says. That means putting money into stocks when that portion of the portfolio falls below the target, as it has this year for many people. "The most important strategy is to make sure that the long-run allocation is kept intact during market downturns like we are experiencing," according to Marston.