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Lindley Estes is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Lower Prices = Less Risk

JACK WORRYWART had the Christmas of his life this year. Out of nowhere, a long-lost rich aunt surfaced and sent him a holiday check for $5,000.

Ecstatic, Jack went shopping. It turned out he was in luck–nearly every store he went into was having a big sale.

Jack’s favorite clothing store was selling his favorite brand of jeans for 10 percent off. His coffee purveyor was hawking two-for-one soy lattes. The neighborhood butcher ordered too many strip steaks, and Jack nabbed some tasty morsels for a pittance of the usual price.

Jack couldn’t have been happier. A big bargain shopper, he loved a great deal.

But while driving home from his Swedish massage (20 percent off!), Jack saw a brand-new store that he knew nothing about. It had the letters “NYSE” and “NASDAQ” on the outside.

Skeptical, Jack went inside to check out this strange market. The manager warmly greeted him, and Jack asked what they were selling.

“Stocks,” the manager replied. “And we’ve got some great deals right now.”

When he heard the word “stocks,” Jack went running. He was no sucker. Who wanted to buy a stock whose price had fallen? That was way too risky for him.

To calm his nerves, Jack went straight to his favorite ice cream parlor. Happily, they had a great special on–buy one scoop, get one free. Jack happily licked away at his chocolate-strawberry combo, thankful for his good fortune.

 

Of course Jack Worrywart doesn’t exist. The story is made up to make a point.

Most people love it when things go on sale. But when it comes to stocks, falling prices cause people to run for the exits. It’s not until stocks get pricey that many people line up to buy.

An article in the Jan. 7 edition of Barron’s declared that the first three days of 2008 were the worst for the Dow Jones Industrial Average since 1932, during the depths of the Great Depression. Things didn’t get much better last week.

This column is not meant to urge you to go out and buy stocks just because they’ve fallen. Difficulties in the housing market, a credit crunch and a possible recession are real concerns that could have a big effect on corporate earnings.

If you think that companies will stumble because of this difficult environment, that is a valid reason not to buy a stock. But not buying stocks just because their prices have been falling? That doesn’t make sense.

There are a lot of reasons why stocks are risky. They don’t offer the same virtual guaranteed return of principal of bonds, CDs or savings accounts. They’re not particularly good savings vehicles for money needed in the short term, as prices fluctuate too rapidly.

But in the long run, stocks have offered better returns than bonds or similar safe investments. Of course it’s uncertain whether that’ll be the case going forward, but what in life is certain?

This column strives to make one central point: When stocks fall in price, they’re less risky, not more. A sale in the stock market for long-term investors represents opportunity, not reason for despair.

Our brains aren’t hardwired to believe that, but rational thought tells you it’s true.

Permalink: http://news.fredericksburg.com/businessbrowser/2008/01/13/lower-prices-less-risk/

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