When stock markets drop over a waterfall, only to quickly surge higher as they did this week, investors can’t help but feel disoriented.
One of the men who helped popularize “buy-and-hold” investing through index funds made a plea to some of Denver’s top investment minds not to give up.
“Don’t abandon equities,” urged Burton Malkeil, professor of economics at Princeton University and author of the popular investment book “A Random Walk Down Wall Street.”
Malkeil addressed the Chartered Financial Analyst Society of Colorado’s fifth annual Forecast Dinner on Thursday night, along with Jeff Macke, president of Macke Asset Management and a commentator on CNBC who favors a more active trading approach.
When stock prices fall to low levels compared with earnings, as they have, and when the dividend yields rise, equities perform much better over the next 10 years than when the opposite is true, Malkeil said.
“This is much more likely to be a time to get into the market than to get out,” he said.
Without fail, the money flowing into the S&P 500 peaks when prices reach a high, while sales are highest at the bottom, he said.
Although the nation’s financial problems are deep, Malkiel doesn’t think the current crisis will repeat the early 1930s, when major stock indexes fell about 90 percent.
“At best, 2009 will be a year when things stop getting worse,” he said. “This is not the Great Depression.”
Macke urged a different and more active course of action. When asked last September what the best positions were to ride out the volatile stock market, Macke responded “cash and fetal.”
Investors face the unwinding of the “greatest global bubble of all time” and the nation doesn’t have the money to keep bailing companies out, he told his Denver audience.
“Markets have few, if any, dependable rules,” Macke said. “Take your gains where you can get them. Control your downside.”
Macke noted there are periods when buy-and-hold works, but also very long periods, including the current situation, where investors get no or meager returns unless they trade.
“Hope is a four-letter word,” Macke said. “It is not a viable investment thesis.”
Macke warned that exchange-traded funds that use leverage could cause the next market crisis by creating exaggerated moves in underlying indexes.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
