THESE DAYS, taking stock of your portfolio feels like riding on a roller-coaster. A raging bull market giving way to a raging disaster, then coming back with a bang: It leaves investors wondering, are stocks worth it?
The first years of the new millennium certainly didn't look promising. Stock investors had to suffer through accounting scandals and corporate bankruptcies, which through 2002 dragged stock portfolios to painful lows. Consider that for 2000, 2001 and 2002, the Nasdaq shed 67%, the S&P 500 lost 40% and the Dow Jones Industrials, 27%.
One would've needed nerves of steel not to jump off the ride. But those who did bail out of stocks back then missed on the markets' fabulous gains in 2003: The Dow finished the year up 25.5%, the S&P 500 gained 28.7% and the Nasdaq tacked on an impressive 50%. And even though 2004 has been somewhat boring (a mere 3% gain for the Dow, 8% for Nasdaq and 9% for the S&P 500), it's been another step forward for investors on the road to recovery. It may be some time until all losses are recouped, but it's going to happen. History has proved it.
Consider that in 1991 — before the decade's raging bull market took off — Wall Street was about as popular as Three Mile Island. Two market crashes, a debilitating banking crisis and an economy flirting with recession had soured most people on investing. And that meant many investors missed out on substantial gains, since they weren't invested in the market when it started to really rise. Sound familiar?
The moral of the story is that you should almost always ignore what the flock is thinking when it comes to stocks. More often than not, it's dead wrong. Savvy investors know that the best time to get into a stock is when everybody else is looking the other way. Certainly, investors who moved into stocks in March 2003 demonstrated that. By year's end, the Dow had gained more than 35%.
If you take a look at the applet below, you'll see that while there are many pitfalls in the short term, the trend is decidedly upward over the long haul. The key, of course, is to buy the right stocks for your situation, which means you should understand why you bought a particular investment, besides the fact your broker said it was a good idea.
