Buy ‘Em When They Hate ‘Em

01/06/2009 11:00 am EST


Tim Middleton, contributor to MSN Money, says stocks are beaten down, and the time to buy is now.

The 2007-08 bear market has been the worst since the Great Depression, more savage than that of 1973-74 (which most of us remember only dimly, if at all), and 2000-02, which we remember all too well.

The combination of two deep bears in less than a decade has poisoned many people against common stocks. The Standard & Poor's 500 index has gone down an average of 0.9% a year over the past ten years, from November 1998 through November 2008. Given this sobering lesson, who would want to own these things?

You would.

Whether you're just getting started as an investor or rebuilding a portfolio shattered by the recent chaos, you need to remember that how well you do depends on what you pay at the outset. And prices now are at rock bottom.

"Today, in my view, the stock market is presenting you with one of the great buying opportunities of your lifetime—perhaps the greatest," says Steve Leuthold, the manager of the Leuthold Core Investment (LCORX) fund, which ranks in the top 2% of similar funds over the past ten years. "Buy 'em when they hate 'em."

Here is what you should not do in the coming year: Wade cautiously back into risky markets such as stocks, dollar-cost averaging your way back to a normal, stock-heavy portfolio.

This is the time to plunge. Dollar-cost averaging is almost never a good idea, but it's a really lousy idea right now.

That's because stock market recoveries tend to be front-loaded. Since 1900, according to Leuthold's research, "the median first-year price gain of 40.9% represents almost half of the median 83.6% total bull market gain for the Dow." Gains in the first three months are the sharpest of all, averaging just over 18%.

Stocks provide the most reliable mixture of potential for capital growth and protection against inflation. For young investors, my allocation recommendation would be 100%. Assuming you have 75% of your assets in equity funds, I would allocate the balance like this: 5% in a commodity/energy fund, 5% in REITs and 15% in domestic high-quality bonds such as Pimco Total Return (PTTRX), the most widely held such mutual fund.

If you think this plan is too risky, think again. Just as relatively low stock returns this decade could have been predicted (and in fact were, by Warren Buffett, among others), based on extreme outperformance in the 1990s, relatively high returns going forward are almost reflexive. This cycle is known as reversion to the mean, and the mean returns of stocks over long periods are in the low double digits.

So, take the money you've got to invest—all of it—and build (or rebuild) your portfolio.

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