Stock Market Investment Opportunities to Come After the Crash
Stock-Markets / Financial Crash Oct 01, 2008 - 11:46 AM GMT
Nilus Mattive writes: I just got back from Bangkok, and beyond the terrific temples and fascinating foods, two things stand out ...
#1. The city's vigorous construction activity, especially the workers hammering away (day and night) right outside my bedroom window.
#2. Trying to go to sleep as U.S. markets were also getting hammered relentlessly.
I immediately saw a direct connection between the two. After all, many of Bangkok's new buildings are being constructed right on top of sites that were originally begun — and subsequently abandoned — around the time of the 1997 Asian financial crisis.
As you might remember, Thailand was at the very heart of the Asian financial crisis. In less than a year, it went from a country growing GDP at about 9% annually to a country with a nearly worthless currency.
And here the Thais were, just ten years later, rebuilding sleek, modern skyscrapers on the very same sites they had dug out a decade earlier. It was a real testament to the power of the human spirit.
Meanwhile, back home, crumbling U.S. real estate was causing a financial crisis in America, and bringing about the most stock market pain in two decades.
As the Thai construction workers shook my window, it occurred to me that there is always banging and clanging going on someplace ... and it is always loudest when you're right in the middle of it.
But eventually, that part of the process is over. It does end. And then it's on to the next phase of construction, which is when you get to see the new structure starting to take shape.
Once the foundation has been laid, things can start to rise again.
That's what has happened in Thailand after the Asian financial crisis, and I'm confident that's what will happen here once the U.S. financial crisis has run its course.
I can't tell you when the dust will settle and when the building will resume, only that I believe this transition will take place.
As a stock investor, I know first-hand just how hard it is to watch massive daily drops in the Dow and other benchmarks, too. I don't want to belittle the significance of these events or pretend they're not important. They affect every single one of us with money parked in investments.
However, just for a little perspective, I'd like you to take a look at two charts.
The first chart shows you what the Crash of 1987 looked like during the hammering. As you can see, it was certainly NOT fun to be in the middle of it ...
Now, here's the same crash, five years later ...
It took the Dow about two years to get back to its pre-crash level ... and another couple years to move much higher.
Regardless, a new foundation was laid.
Take one last look at that chart. Did you notice the scale? Back then, just twenty years ago, the Dow was around 2500! And at the bottom of the crash, it was closer to 1700!
That puts yesterday's 778-point drop to 10,365 into perspective a little bit, doesn't it?
Even after yesterday's horrific decline — the worst in percentage terms since the Crash of 1987 — the Dow has still quadrupled in two decades!
Now, I am NOT saying that you should just plow back into the markets haphazardly.
Nor am I saying that you should stop protecting yourself from further short-term downside.
There's no rule that history must always repeat itself. There is no guarantee that the markets will live happily every after this time around. Depending on how this situation is handled, we could see a relatively swift recovery or a very protracted downturn.
But no matter what, I do think our country will get through this just as it has survived many other challenges.
In the meantime, and until a clear direction emerges, I am advocating a three-step approach in my Dividend Superstars newsletter ...
First, I am keeping a healthy portion of the portfolio in cash right now — about half, in fact. What do I mean by "cash?"
When it comes to sidelined investment funds, I consider Treasury-only money funds to be one of the best places for maximum safety and liquidity.
Second, I am mainly recommending companies that have long histories of paying out dividends through thick and thin. For example, one of the companies has paid dividends for 68 years straight. Another has been sending out checks for more than a century.
While nothing is guaranteed, there's something reassuring about companies that have paid dividends through past recessions, crises, even World Wars! They have products people rely on, they have brands that are known around the world, and they tend to be cash-rich organizations well-prepared for today's tough credit conditions.
Third, I am advocating the use of stop losses and inverse exchange-traded funds as ways to further hedge the portfolio, and protect it against additional downside.
Bottom line: The hammering is bad right now. And I think you should take steps to insulate yourself from it. But I also think you should be hopeful about the new construction that lies ahead.
Best wishes,
Nilus
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