Let's assume, for a moment, that I'm the gutsy type and I've got some extra money in my pocket.
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Given the old saw, "The big money is made by those who buy stocks when there's blood in the streets," it's easy to think a little spare cash and courage might be a magic combination for long-term investors. After all, the blood is certainly there. The tech-laden
Nasdaq Composite Index
is down 56% from its March 10, 2000, peak. Even mighty
is looking a bit dazed, down some 66% since the Nasdaq peak.
I admit it, lately I've felt an instinct to toss some money into a tech fund or growth fund, figuring today's stock prices will look like bargains five years from now, right? The further stocks fall, the stronger the bottom-fishing urge becomes, but a quick rebound also seems less and less likely. If you're hearing the same dubious voices, you might remind yourself of the 1970s when many favorite stocks fell and stayed down for some 10 years. If you absolutely, positively have to try to scoop up some bargains and you have some extra cash, you might want to use the "play money" approach.
The idea here is that you have your portfolio proper, comprised of money earmarked for a goal like retirement, and then, thanks to a year-end bonus, raise or other windfall, maybe you've got a little money that isn't earmarked for anything in particular. If invested with a five-year horizon in an IRA or similar tax-deferred account with fewer tax headaches, this "play money" could be a good way to fish in today's murky waters without sinking your diversified portfolio. Before you do anything, keep two things in mind: This has to be money you don't need any time soon, and it doesn't necessarily have to go to the tech sector, where boffo returns in the rearview mirror might not come again for quite some time.
And remember, even though it's play money it's still money, so let's look at how this would've worked and not worked in the past before charging ahead.
It's probably natural for you to shrug off the market's current malaise because we've hardly had any extended blue periods in recent memory. The
only had two down years in the 1990s, according to
, and it rang up five consecutive years with at least 20% gains for the first time ever between 1995 and 1999. If we take dividends into account, the S&P 500's 3% dip in 1990 was its first down year since 1981, according to
What's With the Dips?
Source: Baseline/Thomson Financial. Returns through Feb. 26.
Given the market's knack for bouncing back from losses in the 1990s, "buy on the dips" types were well rewarded. If we look at some of the places you could have invested, say $5,000 in January 1991, after 1990's tumble, you would've made a lot of money over five years.
In picking funds for these examples, I'm not handing out endorsements, rather I'm just looking at how things would've worked out. (Morningstar's database doesn't let you select fund category averages for hypothetical returns.) In addition to four different
sector funds, you can see how an investment in a small-cap growth fund (
Managers Special Equity), a big-cap growth fund (
Fidelity Magellan) and S&P 500 Index fund (
Vanguard 500 Index) would've performed.
A $5,000 investment in the Vanguard 500 Index fund after 1990's tumble would've more than doubled after five years, and it's the lowest performer of the group.
The same investment in the same funds after 1994's modest 1.4% drop would've worked even better, which probably shouldn't be a surprise because a five-year investment starting Jan. 1, 1995, captures the best five-year period in the S&P 500's history. The $5,000 investment in the index fund would've more than tripled as would have all the funds except
Fidelity Select Health Care.
The caveat, of course, is that this strategy looks great in an inordinately bullish decade. But what if the market is less quick to bounce back these days? Obviously, there's the example of the 1970s where high valuations and steep inflation, among other burdens, jumped on stocks with both feet and stayed there. Consider that in January 1970 shares of
were trading at about $16.75 and only rose to about $17.16 some 10 years later, according to data from
And even in the 1990s, there were some modest periods. Between 1990 and 1995, the S&P 500 rose a cumulative 30%, according to Baseline/Thomson Financial. And there were many secular sufferings within the bull market.
The American Stock Exchange Biotechnology Index
, for instance, fell 4.8% in the five years between 1993 and 1998. The S&P 500 more than doubled over the same period.
This hammers home the idea that you don't have to plow your play money into a sector or thinner sleeve of the market. Putting money into a tech fund, like
Fidelity Select Technology, is certainly looking like a bold move these days. The fund's shares have lost two-thirds of their value since the Nasdaq peaked last March 10.
Two things are certain. One: It's natural to feel the urge to think this might be a solid opportunity for long-term investors. And two: Whether you're destined to be a hero or a goat, it's probably best for bottom-fishers to practice their art quietly and not with their rent money.
On Friday we'll check out some candidates for your play money. See you then.
Fund Junkie runs every Monday, Wednesday and Friday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.