As the stock market extends its stomach-churning twists and turns, many investors have opted to cut their losses by pulling out. Investors yanked $46 billion from equity funds in September, the largest monthly total in more than six years, according to California-based investment research firm TrimTabs.
That's the wrong strategy, according to investment pros like Warren Buffett. In a recent New York Times op-ed piece, Buffett wrote that the beaten-down stock market offers a golden buying opportunity for investors. "A simple rule dictates my buying," he said. "Be fearful when others are greedy, and be greedy when others are fearful."
Buffett and other financial experts offer a litany of good reasons the average investor should take advantage of the down market. There are plenty of companies out there with solid financials and good long-term prospects that are likely to rebound in a big way when the market recovers. What's more, quitting on the stock market now means you're much more likely to miss out on any gains from that recovery.
Indeed, it's a lot easier to be greedy in a depressed market if, like Buffett, you've got billions in the bank. But there are still a number of ways the average investor can take advantage of the scores of deep-discount stocks littering the equity markets.
For starters, take a close look your investment portfolio, from 401(k)s to taxable accounts. Chances are, the big swings in the stock market -- the S&P 500 has fallen about a third this year -- have thrown your asset allocation out of whack. "For people who have cash right now, it's a good time to look at your asset allocation and see where you are," says Cheryl Krueger, a financial planner in Schaumburg, Ill.
Krueger recommends getting your stock allocation back in line by adding available cash to your investment portfolio. For example, Krueger recently freed up some funds after transferring money from one investment account to another. "My stocks had lost a lot more than my bond portfolio had," she says, adding that she invested the new cash in equities.
But she cautions that investors need to be careful where they get that cash. She discourages taking out loans to buy stocks, arguing that the short-term implications of taking on debt will outweigh any long-term benefits. Krueger also notes that investors shouldn't draw too heavily from their savings. "Make sure you have cash reserves built up," she says. "This is not the time to throw all your cash into the market, by any means."
With more talk of recession and renewed interest among consumers in pinching pennies, there are ways to take advantage of buying opportunities in the stock market without laying out more cash. For example, take a look at your 401(k) contributions. If your stock allocation has shrunk too much, consider tweaking how contributions are spread out.
For an investor with a 60%/40% allocation among stocks and bonds, Krueger says temporarily directing all of your contributions to equities will help get your asset allocation back in line. (Investors should shift back to their standard investment strategy once their portfolio is rebalanced.)
Investors with just a few years before retirement should avoid stocking up on equities, even if they can be picked up on the cheap. With a short time horizon, you may not have the time to wait for stocks to rebound.
The investors who will benefit the most, Krueger says, are the ones with long time horizons, who can afford to be patient and let the market reward the shares of solid companies that have drifted into bargain-basement territory.
"If someone had the courage to buy six months ago, I'm not sure why they wouldn't have the courage to buy now," she says. "There's a lot of opportunity out there."