I love fielding intelligent questions on the markets and other financial topics, and lately you’ve been sending me plenty of them.
For example, a Dividend Superstars subscriber named Sharlene recently asked the following question on my blog …
“I am wondering if we should be buying stocks right now, even the stocks that are supposed to be bargains?”
Her concern was that a broad market decline could be imminent, and would impact even the best shares in the process.
My short answer is simple: There is never a bad time to buy a quality stock that is undervalued, as long as your time horizon is measured in years rather than days or months.
Of course, there’s a much longer answer, too …
As I told Sharlene, I absolutely recognize the possibility of a major correction in the stock market over the next year. The reasons are plentiful and include:
- A monster rally of 77% in the S&P 500 since the March 2009 low …
- The simmering sovereign debt crisis sweeping Europe and threatening to land on our own shores …
- And many other threats including a consumer retrenchment, persistently high unemployment, and new legislation that hinders our country’s ability to grow
But let’s also remember that it’s nearly impossible to predict when, or if, another drop will materialize. The recovery — led by an all-too-accommodative Fed — could just as well continue on, with the market returning to its previous all-time highs.
This Is Why I Continue to Advocate
Investing Your Money in Stocks Over Time!
One way to do this is through simple dollar-cost averaging into index funds or individual stocks.
I’ve argued in favor of this approach many times before in this column, but let me just reiterate what it’s about — essentially, you consistently buy equal DOLLAR amounts of the same investment on a set schedule (weekly, monthly, quarterly, etc.). By doing this, you remove much of the risk with market timing and ensure that you are buying more of the investment when it’s trading at a lower price and less when it’s trading higher.
I last mentioned dollar-cost averaging in the fall of 2009, and you can read the full articles here and here.
At the time, I made the case that someone who had been dollar-cost averaging throughout the market decline was still doing quite well.
I used the example of an investor who began using a monthly dollar-cost averaging plan into the S&P 500 SPDR (SPY) in June 2008. And I demonstrated how that investor would have made more money than someone who had regularly put their funds into a money market account — even though the S&P 500 had declined 28%!
Based on the price at the time, 101.2, the total holdings were worth $15,971.94.
Obviously, a lot has happened since that column was written — the S&P 500 was near 1,000 back then and now it’s closer to 1,200. And the latest market action simply proves my point further — someone who continued to pursue the strategy is even farther ahead today than they were last year!
After all, the SPY ETF is now trading near 119. That means that without any additional share purchases, the same $15,000 stake would be worth $18,781.22 today … another gain of 17.5% from my last column!
The results would be even better with additional monthly purchases of $1,000 in the interim, too. All with far less timing risk than you’d have by just moving a giant lump sum in at one time.
Of Course, There’s Another Way to Do This With
Far More Control and, Thus, Even More Upside Potential …
Instead of simply buying fixed dollar amounts of an index fund or a handful of stocks at regular intervals, you could take another approach — buying relatively undervalued stocks one by one, when sectors or companies fall out of favor without reason … when attractive shares are lagging the overall market … or when solid income-producing stocks are being mispriced.
The end result follows the same type of “one toe at a time” logic of a basic dollar-cost averaging strategy but also gives you the chance to make more active decisions (and hopefully outperform the broad market in the process).
This latter strategy is precisely how I run the Dividend Superstars portfolio. I’ve continued to make individual stock recommendations throughout the market’s ups and downs, and it’s worked out quite well so far.
Does that mean I don’t worry about the broad stock market’s direction at all? Of course not!
In fact, I recommended using inverse ETFs to hedge long positions on more than one occasion when the major decline began in full force. And I’m waiting for a couple of stocks on my radar screen to pull back to more attractive levels before I recommend them to my subscribers.
However, my biggest point on whether “now” is the right time to buy stocks is this: We can’t allow the fear of what could happen in a broad way prevent us from taking advantage of individual bargains when they present themselves, nor can we let them derail us from our long-term asset allocation goals.
It just takes research, courage and patience.
And if we’re focusing on stocks that also pay out consistent dividends, we’re mitigating our risk in another important way at the same time!