Wednesday, January 23, 2008

Today's Market Turbulence

Stock market corrections and economic recessions come and go. It’s the nature of a free economy. Add to that Schumpeterian gales of creative destruction, as technological advances bring down old industries in favor of new ones. Turbulence is part of capitalism. But Tuesday’s turbulence should not dissuade investors from buying stocks for the long-run.

This strategy essentially argues for investing in America, which has produced the greatest prosperity in the history of history. I do not see this changing. Right now the stock markets have corrected by roughly 20 percent -- the first time in about five years that we’ve had a true correction. To me this means there are a lot of bargains out there. In fact, the market averages at these levels represent good bargain prices.

I always recommend buying broad stock market indexes. For example, the Dow Jones Wilshire 5000 or the S&P 500. Owning international indexes also makes sense, including emerging-market indexes. A package like this gives investors good diversification, keeps it simple, and covers the world.

I don’t foresee the overthrow of free-market capitalism, and not even Senator Clinton will bring back state-run socialism. Folks who bought the market in late 1987and held it for twenty years did extremely well. I don’t recommend timing the cycles, and certainly not trading on a daily or short-term basis. The idea is to stay long-term. Younger investors should be 100 percent in stocks. Middle-aged investors should be about 80 percent in stocks. And elderly investors should probably be about 50/50 between stocks and bonds.

Be invested. Be diversified. Use cheap exchange-traded fund indexes. And stay optimistic.