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Now’s The Time To Buy – Right?
By JLP | October 24, 2008
So the market is falling – or has fallen. I don’t want to use the word “crash,” but dropping from 14,000 in October 2007 down to 8,350 today (markets are still trading as I type) is pretty dramatic no matter how you phrase it.
If you believe history – and Warren Buffett - now is an excellent time to be buying stocks. Yes, things could get worse, and yes everything in uncertain, but remember how the whole premise of investing is “buy low and sell high?” Well, stocks are lower than they’ve been in years. Therefore, now is a better time to buy than we’ve seen in years. So if you had no problem loading up your portfolio when the Dow was trading around 11,000, you should have even less of a problem now – unless of course you have no confidence in the markets and you think the whole stock market is going to crash and never recover.
I’m on Team Buffett and see no choice but to assume that eventually, the markets will rise again (given the alternative of stocking up on food staples and hoarding any valuables with which I can barter when our financial systems collapse forever). Of course, “eventually” is the key word. I have no idea if it will be next month, next year, or next decade when the markets recover their losses.
So with regard to my long term (i.e. “retirement”) portfolio, I find some comfort in the fact that my bi-monthly 401(k) contributions are picking up more and more shares as the markets decline. I find so much comfort in that fact that I feel the need to buy as much as possible.
In the last couple of weeks I have invested around $1,000 in stock market index funds outside of retirement accounts (international and domestic) by adding $100 or $200 each time the market set a new “low.” That money would have otherwise gone into cash savings. I also boosted my 401k contribution from 8% to 10%. But I still feel the urge to do more. So I came up with a plan.
I’m breathlessly considering increasing my Roth 401(k) contributions from 10% to 20%. That would mean that in 2009 I would max out my 401(k) – which would be so exciting! I wasn’t planning to do that anytime soon, because it would require the suspension of all non-retirement savings.
But the thing is, all those non-retirement savings will eventually be spent – either on vacations or a car or furniture or a wedding, etc. So while it’s prudent to save for those expenditures, I feel like I’d really benefit more from maxing out my 401k because I really won’t touch it for decades. And besides, I may not work for many years at a job that offers a 401k – and Roth 401k’s may not even exist for very long as congress struggles to balance the budget, especially since they allegedly only benefit rich people (God forbid). So I should take advantage while I can – right?
Should I do it? My emergency fund would currently get me through several months of living if I lose my job, and of course I can always lower or suspend contributions if I get in a tight spot. Plus I’ll put any tax refund and bonus checks into my liquid savings in ’09, so it’s not like it won’t grow…
What do you think??
Topics: Miscellaneous | 19 Comments »
October 24th, 2008 at 10:36 am
I say go for it–this is exactly the kind of market conditions that will skyrocket long-term/retirement savings for our generation if we’re smart enough to take advantage of it.
October 24th, 2008 at 10:48 am
Don’t do it. The market is going to go a lot lower. Wait at least another year. It you want to buy something, buy some gold.
October 24th, 2008 at 10:52 am
I’m not going that crazy. My 401K contribution is due to go up another 2% in January and I’m leaving it at that.
October 24th, 2008 at 11:16 am
Here’s one opinion on Mr. Buffet’s latest comments on the stock market.
http://www.lewrockwell.com/decoster/decoster136.html
October 24th, 2008 at 11:32 am
@ Curt – I agree the markets may go lower. But it seems to me that only makes it a better idea to dollar cost average more money into the market over the next year or two. Surely this period will be looked back on as a great buying opportunity?
@ Outdoorsman – I disagree. Buffett’s advice has remained steady for years, if not decades. He’s used the “buy when others are fearful” line many times long before this market meltdown, and he’s been consistently optimistic about the US stock market over the long term. He could be wrong, of course, but I don’t think he is (or would be) allowing himself to be used by the government to spread propoganda he doesn’t believe.
October 24th, 2008 at 11:36 am
If your comfortable with it, go for it! I just increased my 401(k) contribution from 5% to 10% when we paid off our last credit card.
October 24th, 2008 at 11:37 am
It is still very uncertain where this market is going. Even the famous Ben Stein who is a personal whiz with the markets said that he has lost money in this market, it nearly wiped him out. According to BBC World News yesterday, some Russian Billionaires have lost half or more of their fortunes.
This market is NOT business as usual. Don’t go treating it as business as usual.
I would say, if you really want to up your contributions to your 401k, that is your decision. But stay out of stock mutual funds. Keep it in a money market until the economy begins to recover.
The government economists are projecting this recovery to be late 2009. But they have been behind the curve and absolutely wrong since this whole thing began. I think it won’t recover until late 2010, possibly 2011.
This market is a massive meat grinder. Stay out of stocks and stock funds.
This is a worldwide recession on the scale we have never seen before. Half of Chinese toy factories have ALREADY shut their doors because of the collapse of orders, and it isn’t even Thanksgiving/Christmas yet, which is supposed to be the biggest sale of the year. Stay out of foreign stocks too, this is just beginning.
You can buy back in anytime, but you can’t get back the money or time you lose. Wait until things show a solid recovery, which I think is late 2010 at the latest.
One last thought. If the housing market were gyrating as wildly from day to day (5 to 10% swings daily), would you be buying right now, or would you wait for prices to come down further or to calm down?
Markets like these make paupers of the gullible. Stay out of stocks and stock funds for now.
October 24th, 2008 at 11:56 am
I’ve increased my 401k contributions as well in response to what’s happened recently (and incidently plan on maxing out in 2009 too). At 26, with a decent emergency fund, I feel like my wife and I should be maxing our Roth IRAs and my 401k and then saving what we can from there.
October 24th, 2008 at 12:46 pm
I’ve been considering the same thing (increasing my contribution) using the same logic, i.e., dollar cost averaging. While I agree that the market is still ‘wild’, and that it’s likely to remain that way for some time, I’d rather stick solidly to a long-term strategy than attempt to time the market in the short-term (e.g., transition from safe to riskier funds once and if we get back to fundamentals).
October 24th, 2008 at 4:37 pm
I’ve been buying stock mutual funds like crazy.. Granted I am being smart and using extra money I dont really need right now, I have a Gi-hugic emergency fund, Im 100% debt free, I am hoping to buy my first house in about 7 to 10 years from now, so this money going in to stock mutual funds 10 years from today could make a really great downpayment for it, or if things go really good, Have enough built up to buy the place outright and still have money left over. One good thing about the market staying down… each day that it stays down means one more day I can delay moving in.. thats the only thing i’m not looking forward to when I buy a house.. actually having to do the moving in part… ugh.
October 24th, 2008 at 5:36 pm
You’re without dependents and have a good rainy day fund? Then why not?
However for those w/debt, uncertain job futures, near-term significant needs, and/or college on the horizon, I wouldn’t lock it up in a retirement acct. Much better to have access in these uncertain times. I never thought our savings bonds would look so good…
October 24th, 2008 at 9:44 pm
Time? I don’t know. I don’t care. But I do know that now there are many more opportunities to buy companies at attractive prices than there was a year ago. I mainly buy for yield given a margin of safety. Further declines simply mean that my yield or as I see it “my annual retirement stipend” becomes easier to increase. In fact it’s twice as easy as it was a year ago.
October 24th, 2008 at 11:15 pm
I say go for it.
Yes, the market could go lower, but you’re not trying to time the market. You’d be making a decision that based on historical performance, buying when the market is under 9000 would be a bargain.
I plan on increasing my investments. I’m going to open up an individual IRA (in addition to my Roth 401K).
Also, I recently moved the portion of my 401K that was in bonds (about 7%) into a low expense S&P 500 index fund. I know that the market may go down, but I don’t think it’s going to crash. Eventually it will pay off. I’m still 30+ years from retirement, so I have time to wait.
October 25th, 2008 at 8:27 am
1) Buffett didn’t say which stocks he was buying. It may be an excellent time to buy certain stocks. I think it’s a poor time at the moment to buy stocks broadly.
2) BRK has dropped $35k from its high. Might he not want to encourage people to buy stocks?
October 25th, 2008 at 6:29 pm
@Outdoorsman – if Buffett had been such a propagandist as your link seemed to imply, how come he wasn’t screaming “buy” in 2004? In fact, in 2004 he said that he cannot find any values in the market, that he is under-invested and it’s bad, but it’s better than to regret it later. He also called derivatives “financial weapons of mass destruction”. Similarly in 1999, Buffett told that we shouldn’t forget about Cinderella: if you don’t leave the ball on time you’d be left with pumpkins and mice. Both during the internet boom and during the real estate babble Buffett expressed concerns about the markets repeatedly. So he isn’t always telling you to buy.
At the same time, two times when Buffett told he was buying – in 1979 and, if I am not mistaken, in 1990, he ended up right.
Even while 2004 wasn’t exactly the top, and 1979 wasn’t exactly the bottom, if you followed Buffett and bought in 1979 and 1990, then sold when he warned in 1999 and 2004, you’d have come out ahead.
I think his track record speaks for itself.
It is quite likely that the market will go lower. The problem is if you wait until the economy starts to improve, you may miss 30% of the next bull market. Historically, markets have gained 30% of bull market values within first month at the start of bull market. Markets look-ahead, so they start go up several months in advance of actual recovery. You don’t know when it’s going to be. By waiting until the market goes up, you may lose a large chunk of the gains.
@MBhunter – 1) is a good point. In fact, in my brokerage account I may start buying specific companies only – those with great balance sheet, great earnings, good guidance – i.e. those that went down for no reason at all just together with everything else. Specifically dividend payers. Unfortunately there is no such possibility in 401K, although I may look at which companies some of the “value” mutual funds are buying, and if I like these companies – invest in these funds.
I don’t believe in 2) – specifically because of his track record. If he so believed in his ability to influence the crowd, he’d not warned us in 2004 and in 1999. So far, there haven’t been any time in history when he could have being accused of trying to influence the markets for personal gain without good reason. Why do you think he suddenly starts doing it now?
How about those who criticize Buffett – what is their track record?
October 27th, 2008 at 2:55 pm
I wish I could invest more in my retirement fund, but the next best thing is moving my funds from safer investments to the small and large caps, which I’m doing over the next 6-8 months until I’m 100% back in stocks. Even if the market goes down for months to years after I’ll still end up ahead twenty years down the road.
October 28th, 2008 at 6:00 pm
Right now I have close to $1 Mill. of 100% borrowed money that says that now is a very good time to buy in.
October 30th, 2008 at 4:42 pm
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November 25th, 2008 at 1:56 pm
I try to always be optimistic. Based on optimism then now is definitely the time to buy. Unfortunately this is a large and complicated mess and technically speaking could lead to something worse than a recession.
Better to be safe than sorry, so I am trying to buy stocks (to catch any long-term upside) but I am also trying to prepare for the worst.
Good post.