IS IT TIME TO MOVE CASH INTO EQUITIES?
A super Tuesday renews a lot of hope. October risked being the worst month for stocks in decades
until the amazing rally on October 28. Tuesday, the Dow Jones Industrial Average had its second
biggest point gain ever, rising a mindblowing 889.35 (10.88% in a single trading day). The NASDAQ
soared 143 points (9.5%).1 The S&P 500 also notched its second-biggest point gain Tuesday (92 points,
or 10.79%).2 All this had investors hoping that some kind of bottom had been reached … but history
would seem to indicate otherwise.
A time to buy, or just a bounce? While Tuesday’s rally was truly spectacular, remember that bear
markets see big rallies more often than you might think. Big market corrections have a habit of
eventually promoting astonishing rallies, as bargain-hunters see their big chance. As investment
strategist and radio host Daniel Frishberg reminded an audience Tuesday, “There has never been a rally
on the Dow of more than 300 points in an actual bull market. These gigantic moves have only taken
place in bear markets since 1995.”3 In fact, the amazing 11.1% Dow gain we saw on October 13 wound
up being erased by later losses.4
When faith is lost, can you find the bargains? As Warren Buffett has said, “You want to be greedy
when others are fearful. But what do most investors do? They buy high and sell low … and buy and sell
and buy and sell … impatiently.
DALBAR, that goldmine of investment research, looked at the behavior of the average mutual fund
investor over a 20-year period ending December 31, 2007. The 20-year survey found that while the
broad stock market (S&P 500) returned an average of 11.82% over those 20 years, the average mutual
fund investor bailed out at times, missed out on great market days, and only realized an average return
of 4.48%.5 This is a really compelling argument for patience and sustained investment. In fact,
esteemed investors Warren Buffett and John Bogle both say this is a good time to buy and hold.6
Have we seen enough capitulation? Have you ever heard of that term? Historically, capitulation
represents the concluding phase of a bear market. There is a point of “surrender” or maximum exodus
from stocks to CDs and Treasuries, and when that point is reached, a measured, orderly recovery is
poised to begin. Are we at that point? Have we seen that point? That is the multibillion-dollar question.
Some analysts feel the markets are still shaking out, and that we might see some more descent before
a real bottom is reached. Others feel that the market is so fundamentally strong that anything is
possible – after all, on October 28, the Dow rose 889 points just hours after news of an all-time low in
consumer confidence hit the media.7
To buy, or not to buy? That is the question, and the answer should be made in light of your long-term
goals. Talk to a qualified financial advisor today to gain more insight before you make a move.
Ishan Goraydiya is passionate writer and loves writing about Retirement and Financial Planning.
These days he is writing on Esso Employees Credit Union.