Q: Why is my financial advisor telling me to buy, buy, buy at the current low prices but you’re losing money at the same time on the same stocks?
Anne, Burlington, NJ
A: Many financial advisors see the current crazy stock market, with its highs and lows, as a time to buy stocks that are essentially “good” but have been battered because of the bad economy.
In other words, think of the current stock market as a red tag retail sale. On the racks are perfectly good clothes that just aren’t selling well or are last season’s duds. During such a sale, would you insist on paying full price or question the sale? No; you would grab the goods you want and get out of the store as quickly as you can.
In many ways, that’s what’s going on in the stock market. There are solid stocks with share prices that are depressed because of the recession.
Now, having said all that, I also need to warn you about taking risks if you don’t know what you are doing. Just like with a retail sale, you don’t want to end up with something that you don’t want. This can be a good time to buy, but it can also be a great time to lose your shirt.
You need to remember that when you invest, you risk losing your principal. So, please don’t let anyone talk you into investing with money you’ll need in five years or less.
What you also need to keep in mind is that investing is one way to beat inflation. If you stick your money under the mattress or keep all of it in a low-yielding savings account, you risk running out of money. You invest with the hopes of making your money grow to at least keep up with inflation. And why should you worry about inflation? You need to make sure the money you have today can buy the same goods and services you need in the future.
As for which stocks to buy, I can’t tell you that. Nobody really knows what the stock market will do day to day. But you certainly don’t want to buy stock in a company that is unhealthy. For months, we’ve known General Motors was having trouble and would probably end up in bankruptcy. A smart investor would not have loaded up on this stock, even though it was at historic lows. Now that GM has filed for bankruptcy protection, its stock is likely to be worthless if the company emerges from bankruptcy protection. Still, there are other companies that are stable and even growing, even though their stock is down.
According to InvesTech Research, it takes about three years for the stock market to recover after the type of recession we’ve been experiencing. If you buy good stocks now, as part of an individual portfolio or within a mutual fund, you stand the chance of benefiting when the stock market rebounds. And, historically, it always does. The question is how long can you wait before you need your money?
Whether you are investing in a mutual fund or buying individual stock, the key is, and always will be, making sure you are well diversified. Diversification won’t save you from losses, but it will help mitigate them.