Wednesday 4 March 2009

The Case for Dumping Everything Now

The Case for Dumping Everything Now
By Dan Caplinger March 3, 2009 Comments (14)

By now, you must be tired of hearing about how, after witnessing the worst stock market losses in generations, you should simply have faith and keep investing. Common sense says it's ridiculous. Why should you throw good money into the market right now, when no one has a clue what the future will look like mere weeks from now, let alone in the years to come?

You don't need me to come up with reasons why you should get out now. Just take a look at the latest news:

All the government action we've seen over the past six months just seems to have made a bad situation worse, shaking the foundations of our capitalist system to the core.

Even after all the damage we've seen in the housing market, home prices could easily keep falling further than they have already.

Stocks fell Monday to their lowest levels in 12 years, and with November's lows broken, some believe that's just the start of another major downturn that could lop another 40% off the major indexes.

Given all that, the argument in favor of selling everything for whatever you can get basically boils down to three points:

  1. The cyclical nature of the economy has ended, and there's no hope that businesses can grow or even come close to their past glory.
  2. Everything that everyone has done to try to support the economy will ultimately fail.
  3. Once everyone figures out that the only thing holding up this house of cards is unsustainable government spending, people will abandon the current economic system, and all the financial assets that previously held so much value will become worthless.

Sounds reasonable. Sign me up.

Oh, come on! As a skeptic and a lover of conspiracy theories, part of me really sympathizes with this train of thought. Having dropped so far so quickly, there's no apparent reason why the market couldn't drop more. Plenty of investors have lost so much already that they may well not be able to afford to take any more risk with their life savings. Whether mere greed or a simple failure to understand the risk of the stock market got them into stocks, it's unfortunate that so many people have gotten hurt by these declines.

But all this pessimism really just looks like an amplified version of what you always see at market extremes. When stocks are flying, as they were in 2007, no one thinks they'll ever stop. Once they've crashed and burned, as they did in 1982 and 2002, people think they'll never come back.

Change does happen

That's not to say that every stock will survive. Countless firms went under during the Great Depression. Among the Nifty 50 stocks of the 1960s and 1970s, companies like Polaroid saw their huge rises turn to declines. Polaroid went nowhere for decades before eventually declaring bankruptcy.

Similarly, this time around, many companies will never see their former strength restored. I don't know whether big financial firms such as Citigroup (NYSE: C) and Bank of America (NYSE: BAC) will share Polaroid's fate. They might.

But like so many times in the past, they may well recover from the abyss and deliver great returns. Consider how some of these Nifty 50 stocks -- the same ones that did so badly in the 1973-74 bear market -- did when they finally bounced back:

Nifty 50 Stock
Return 1/1/1973 to 12/31/1974
Return 1/1/1975 to 3/2/2009
Coca-Cola (NYSE: KO)
(62.8%)
9,350%
IBM (NYSE: IBM)
(45.6%)
2,046%
3M (NYSE: MMM)
(44.4%)
2,216%
Procter & Gamble (NYSE: PG)
(24.2%)
4,732%
Disney (NYSE: DIS)
(82.2%)
4,621%
Source: Yahoo! Finance.

These stocks may again prove to be tomorrow's leaders -- or get replaced by others. But the important thing for investors is that some companies will survive to see their stocks flourish.

As attractive as the case for dumping everything now may seem, it's not the right move. Unless you truly believe the end of everything is nigh, betting on the long-term recovery of the world economy is the best choice -- and it's likely to pay off, given enough time.

For more on getting your portfolio back on track, read about:
The ultimate safe-haven investment.
Is it finally time to buy bank stocks?
Investing in the best companies on Earth.

Fool contributor Dan Caplinger is willing to go down with the ship -- at least with some of his money. He doesn't own shares of the companies mentioned in this article. 3M, Coca-Cola, and Disney are Motley Fool Inside Value selections. Disney is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy will never dump you.
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