Patience is a Virtue: Why Holding on to Stocks or Funds Could be Your Best Strategy in a Rocky Market

As incredibly difficult as it is to watch your investments plummet, it's important to remember that the wild ride the markets have been on will eventually pass. Patience and a commitment to investing based on solid fundamentals - not market momentum - is an important factor in recovering losses and building solid portfolios over time.

From 1998 through March 2000, there was frenzy in the stock market. Many large-company growth stocks - particularly technology and Internet issues - were catapulted to levels that turned out to be unsustainably high. Investors thought they would make money on just about any stock, so they bought stocks indiscriminately, based purely on the upward momentum of the stock market. Optimists thought the rally would go on forever. It didn't. The year 2000 marked the end of what many believe is the greatest investment bubble ever.

Today we're faced with the opposite reaction. Many investors have lost money - and confidence in the markets. As a result, they've sold stocks indiscriminately, based purely on fear and the downward momentum of the stock market.

But leaving the stock market now might not be a good idea. Many analysts believe that now, more than ever in the recent past, there is incredible value in the stock market. To profit, however, investors must choose stocks carefully based on solid fundamentals, or fundamental analysis - analysis of a company based on its earnings, management, etc. They must also be patient, and hold on to the stocks for quite a few years.

This can be a profitable technique. Why? In a market crisis or panic, the normal guidelines of "value" disappear. People no longer examine what a stock is worth; instead they are fixated by prices cascading ever lower.

Patient and diligent investors can make it through a market panic successfully if, before selling, they carefully analyze the reasons put forward to support lower stock prices. Things to consider: Has anything about the company (other than it's stock price) changed that would justify selling it? Is it's management still good? Does it still have a market niche? Are it's earnings still promising? More often than not, the reasons will disintegrate under rational scrutiny.

Consider the 1990 financial crisis. The mania in commercial real estate in the 1980s led to the worst drop in real estate prices in the postwar period. As real estate markets tumbled by as much as 75 percent in some areas, the banks and other companies that had financed the deals felt the heat, too. A full-fledged panic in financial stocks began during the Gulf War crisis in August 1990. Financial stocks went into a free fall. But most of the companies - those with good fundamentals, track records of strong earnings, and adequate capital - survived. And as a group, financial stocks went on to outperform the S&P 500 throughout the remainder of the decade. Investors who fled from financial stocks in 1990 gave up the opportunity to enjoy significant gains down the road.

This is true of many other crises as well. The table below shows the 11 major crises since World War II. It measures the Dow Jones Industrial Average at the bottom of each crisis, along with the subsequent performance one and two years later. After examining the 11 major crises of the postwar period, you'll see staying out of the market has been exactly the wrong thing to do in every single case. In many cases, holding stocks for two years after a crisis often resulted in solid returns.

Performance after a crisis (performance of the Dow Jones Industrial Average through 11 major postwar crises - appreciation only - does not include dividends)

What can we learn from the past? Remaining in the market might be a good choice. That doesn't mean you should necessarily hold onto all of your stocks. But re-evaluating your portfolio based on fundamentals might be a better option than selling indiscriminately. The market turbulence we're experiencing now won't last forever-and investors who focus their assets on companies with good fundamentals and long histories of solid earnings growth-and stick with them-could profit in the end.

BlackBostonOnline.com - It's your site.

Copyright © 2001 BayState Web Technologies, Inc.
All rights reserved. Republication or redistribution of BlackBostonOnline.com content is expressly prohibited without the prior written consent of BayState Web Technologies, Inc.