If you are an investor in the stock market or real estate, are you considering selling your investments because of the current market conditions?The major U.S. indices are down more than 20% from the recent peak set in October, 2007 - officially marking the return of the Bear market. Oil is more than $145 a barrel, and showing a real impact at the gas station when you take your car for a fill-up. Real estate prices are back to 2004 levels, or perhaps even 2003 or 2002. Foreclosures, Short sales, Auctions and Loan Defaults are accelerating, and going through the roof. Countrywide, the nation's largest home lender, was acquired by Bank of America earlier in the year; then it was Bear Sterns that had one last gasp, before getting a bail-out from JP Morgan and Federal Reserve; last Friday, IndyMac, one of the largest lenders in the nation and California, went bankrupt and closed doors. And there are rumors on whether Freddie and Fannie will survive through this mess. Oh my!
Your hard-earned money has perhaps lost 10%, 20%, 30% or even more than 50% owing to investments in the stock market or real estate.
What do you do?
Do you sell or hold on to your investments? Or do you double down?This is perhaps the toughest question you would need to answer.
History shows that markets go through cycles of expansion, peak, contraction, consolidation, expansion, peak.... bull markets and bear markets. For instance, after the dot-com meltdown, we had an unprecedented boom that began in 2002 and lasted through 2007 - over five years. The bear market had lasted about two years prior to that. Whereas the last bear market had to do with the collapse from the dot-com euphoria and companies who lacked fundamentals, the current bear market is driven by larger macro-economic factors impacting the nation whole.
Fundamentally, except for the financial companies who had exposure to mortgages and sub-primes, most of the sectors are doing equal or better than they did in 2007. This is HUGE! However, Wall Street's business is driven by finance - and when the going was good, many Wall Street firms doubled up on the risky bets of the derivatives, sub-primes and mortgages. And they paid a dear price! The smart firms such as Goldman Sachs actually made money. Now some of the Wall Street firms want to save their face, and also make up for the huge losses. One way to do this is spread fear, talk the bear talk, get inside the investors' psyche, bet down the entire market - and make money as the markets go down. Someone has to panic as markets go down - the ones who panic the most are not the large Wall Street firms - instead, they are the individual investors who can't stomach the losses on their portfolio, and sell out while the chips are down. While the individual investors are selling at lowered prices, large hedge funds and institutions are making money.
So should you sell out now, or wait?
If you have invested in companies with great fundamentals, solid operations, sound management, and if these companies are still growing or holding steady in these tough economic times, you should have the strength of conviction and hold on to your investments. Just ask two questions - are they going to be around tomorrow, and are they going to be stronger than what they are today? Perhaps, you want to invest more if you believe in their future.
What are some of these top companies? GE, P&G, 3M, IBM, Apple, HP, Intel, J&J are just a few companies who have withstood economic and market downturns for the past decades. Newer bell-weathers include Cisco, Microsoft, McDonald's, Costco, Nike, Amazon.com, eBay, the new AT&T, RIM, Google and more.
An often repeated stock market mantra is to "sell in May and go away."
One often forgotten fact is historically the market has performed differently - "better" - in presidential election years.A recent chart by
Chart of the Day details the performance of the Dow Jones Industrial Average in election years.
With the 2008 presidential campaign now in full swing, today's chart illustrates how the stock market has performed during the average election year. Whether the average election year is measured from 1980 or 1900, the market has tended to struggle during the first five months of an election year. That initial subpar performance was then followed with a rally (on average) right up to the November election. One theory to support this election year stock market behavior is that the first five months of choppiness is due in part to the uncertainty of the outcome of the presidential election (the market abhors uncertainty) with the market beginning to rally as the outcome of the election becomes increasingly evident.
If some of your other investments are making money, it may be a good idea to balance them with the ones that are losing money towards the end of the year.
To Sell or Not to Sell? You Decide.
About
Innovation Index Group:
Innovation Index Group, Inc. is a new research company focused on systematically identifying, tracking, researching and reporting on the most innovative publicly traded companies in North America – collectively called the
Innovation Index. Over the past six years, the Innovation Index
would have generated a gross average annual return of 40% based on historical model.*
The Innovation Index Reports:
Introducing The Innovation Index - Learn about the Innovation Index
Innovation Index Group BUY Recommendations - 2008 BUY Recommendations and Estimates
Q1 2008 Report - Innovation Index ahead of S&P 500 - Q1, 2008 Report
The Innovation Index closes 2007 at 66% - 2007 Annual Report on the Innovation Index
Top 50 Innovative Companies in the world - 2007 Report on Top 50 Innovative Companies
Annual Report - Chapter One - Total Innovation Activity - 2006 Annual Report One
Annual Report - Chapter Two - The Top Innovator - 2006 Annual Report Two
Annual Report - Chapter Three - The Innovation Insights - 2006 Annual Report Insights
Innovation and Stock Performance Correlation - The Innovation Index and Stock Performance
Future earnings guidance, A leading indicator - Earnings Guidance and Stock Price
Smart Investing In Tough Economic Times - Guide to Prudent, Value Investing
About The Innovation Index
The Innovation Index introduced in December 2006 is a weighted stock price index of the top 20 Innovators in North America.
The Innovation Index returned 66% in 2007 based on performance model, and would have returned 174% over the previous five years (2002-2006) based on historical model*. This assumes equal investment in each stock of The Innovation Index as of December 31, 2001. An average of $100 invested in The Innovation Index on December 31, 2001 returned $454 as of December 31, 2007. By comparison, $100 invested in S & P 500 returned 28% or $129, $100 invested in NASDAQ returned 34% or $136, and $100 invested in the Dow Jones Index returned 30% or $131 through December 31, 2007. The Innovation Index beats the S & P 500, NASDAQ and Dow Jones Index by more than seven times over the past six years.*
Alphabetical list of the Top 20 Innovators of The Innovation Index for 2008 and their stock ticker symbols:
3M Company - (NYSE: MMM)
Amazon.com, Inc. - (NASDAQ: AMZN)
America Movil - (NYSE: AMX)
Apple Inc. - (NASDAQ: AAPL)
AT&T Inc. - (NYSE: T)
Best Buy Co., Inc. - (NYSE: BBY)
Cisco Systems, Inc. - (NASDAQ: CSCO)
Costco Wholesale Corporation - (NASDAQ: COST)
eBay Inc. - (NASDAQ: EBAY)
General Electric Co. - (NYSE: GE)
Google Inc. - (NASDAQ: GOOG)
Hewlett-Packard Co. - (NYSE: HPQ)
Intel Corporation - (NASDAQ: INTC)
International Business Machines Corp. - (NYSE: IBM)
Merck & Co., Inc. - (NYSE: MRK)
McDonald's Corporation (NYSE: MCD)
Microsoft Corporation - (NASDAQ: MSFT)
NIKE, Inc. - (NYSE: NKE)
Research In Motion Limited - (NASDAQ: RIMM)
The Proctor & Gamble Company - (NYSE: PG)
The Innovation Index will analyze the positions and standings of the Top 20 Innovators at the end of each year. For 2008, there will be no further changes in The Innovation Index.
Disclaimer: The Innovation Index Group, Inc. invested in the stocks comprising The Innovation Index.
*Past Performance Does Not Guarantee Future Results
References:
Source: Sphere: Related Content David Templeton, CFA
