Now is not the time to sell your stocks, financial experts advise
By Don Shilling
Investors shouldn’t fear a repeat of the Great Depression, a professor says.
LIBERTY — Don’t give up on the stock market because better days are ahead, a group of local professors say.
“Bad news is a golden opportunity for investors,” said Peter Chen, assistant professor of finance at Youngstown State University.
He said Tuesday at a financial forum that he was disappointed that stock markets advanced about 10 percent earlier that day. Payday isn’t until Friday, so the advance meant that he missed out on a 10 percent gain on any stocks he would buy, he said.
Investors need to have the outlook that a drop in prices creates a buying opportunity, he said. It’s like buying groceries. If broccoli drops from $3 to $1, you can afford to buy more, he said.
The only people who lose money in the stock market are those who invest when prices are increasing and then sell when prices fall, he said. Throughout U.S. history, no one has ever lost money by investing in stocks for 10 years after the market drops 45 percent, he said.
Today, investors should stay in the market if they have 10 to 15 years to invest, have cash reserves of three to six months income and can emotionally handle the ups and downs of the markets, he said.
Chen’s message of optimism was consistent among the speakers at the forum put on by the Arab-American Cultural and Educational Center on Belgrade Avenue. The YSU professors encouraged the 50 people in attendance to take heart even though the S&P 500, an index of the stocks of the nation’s largest companies, this month had declined as much as 45 percent since last October.
“When we go down fast and far, it’s almost guaranteed that we will bounce back,” said Tomi Ovaska, assistant professor of economics.
He showed how stock price drops in the Great Depression and other times always were followed by larger gains. For example, stock prices dropped 89 percent from 1929 to 1932 but rose 372 percent from 1932 to 1937. Stock prices fell 36 percent in 1987 but gained 450 percent from 1987 to 1990.
“Be careful if you leave the market now,” he said.
Albert Sumell, assistant professor of economics, said a recent poll showed that 60 percent of Americans think a depression is likely or very likely.
Many people don’t understand how bad the Great Depression really was, he said. Unemployment reached 25 percent, and the nation’s gross domestic product — the value of all goods and services — fell by 30 percent.
“The chance of this happening is incredibly small,” he said.
Sumell said the U.S. could be in store for a severe recession with unemployment perhaps reaching 10 percent, but there will be some good that comes along with the bad.
Stock prices will eventually rise, and the nation will develop a more sound financial system, he said. Also, Americans will begin to save money again to protect themselves from an unforeseen event, such as a job loss, he said.
This seems to be a good time to put those savings into the stock market, he said. He pointed out that Warren Buffett, the billionaire investor, recently said he was moving all of his personal investments to U.S. stocks.
The key to Buffett’s strategy, Sumell said, is “to be greedy when others are fearful and to be fearful when others are greedy.”
The stock market overreacts to both good times and bad, Sumell said. The Dow Jones industrial average, for example, should never have reached 14,000 last year and it shouldn’t have fallen to 8,000 as it did this month, he said.
shilling@vindy.com