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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.
This week’s (8/29) investing column
THE STOCK market has been a roller-coaster this year, but when it’s all said and done, the rises and dips have been much ado about nothing.
Pretty much all year market momentum has shifted back and forth–weeks of optimistic buying followed by weeks of pessimistic selling.
So if you look at a shorter-term chart of the market, you’ll see plenty of jagged edges representing peaks and troughs. Taking a longer view, however, the market has essentially moved in a flat line this year and even this entire decade.
The Dow Jones Industrial Average was at about the same level in the spring of 1999 as it’s at now. In other words, people who invested in a Dow-based index fund in 1999 would have made exactly zero money in the ensuing 11 years other than the dividends collected.
Of course in between there have been dramatic moves, with the Dow going as high as 14,000 in October 2007 and falling as low as about 6,500 in March 2009. People who bought low and sold high have done well, but unfortunately the evidence shows that most people do just the opposite.
The trend of short-term volatility coupled with long-term stagnation has been even more clear this year. The Dow started the year at 10,500, went below 10,000 in February, got to 11,000 in April, went back below 10,000 in May, again neared 11,000 earlier this month and broke back below 10,000 Thursday before again cracking that level Friday.
That whipsawing action has likely been enough to drive many people out of stocks and into bonds, whose returns have been strong (see last week’s column).
So what are dedicated stock investors to do in the face of all this drama? Here are a few suggestions.
Figure out what a company is worth, buy its stock when it dips far enough below the intrinsic value to give you a margin of safety, and then hold while ignoring what the market tells you the value is. In the meantime, collect the dividends and consider buying more if the stock remains a value.
That approach is easier said than done, unfortunately. A more realistic approach for most investors is to commit to a dollar-cost averaging program in which you put the same amount of money into the market (ideally a diversified mutual or index fund) every month. This takes emotions out of the process and guarantees that you’ll receive more shares when market prices are lower, which juices your returns when (if?) the stock market rallies.
Buy low, sell high. A profitable strategy this year would have been buying stock when the Dow was around 10,000 and selling when the market rallied 10 percent. And then repeating the process. Be careful with this one, however, as there’s no guarantee that this trend will continue, and this strategy would also lead to high commissions and tax consequences.
Use options to bring in more income. Many people don’t understand options, and that’s probably a good thing. But there are conservative options strategies out there for people who hold blue-chip stocks and want more income. Selling covered calls lets you bring in some additional income while holding on to the underlying stock. If the stock price declines, you keep the income from the call premium and the stock. If the stock rises above the option strike price, you may have to sell the stock, but you’ve made some capital gains and can keep the premium.
I may write more about this options strategy in a future column. If you’re intrigued, ask your financial adviser about it or surf the Web or buy a book to learn more about selling covered calls. Or e-mail me–I’d be happy to go into it more.