Matters: With Gerald Loftin
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
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
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
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.
- It's your site.
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