David Sinow has managed money for more than 25 years, founding a financial planning company and full-service bank before joining the College of Business in 2001. Sinow, a clinical professor of finance who teaches classes on stocks, bonds, securities and wealth management, offers tips on how to navigate today's choppy economic waters in an interview with News Bureau Business and Law Editor Jan Dennis.
In light of the current turmoil in the stock market, what advice do you have for investors?
No. 1, take a deep breath. No. 2, understand the lessons of history. Those lessons are undeniable, and that is over very long periods of time the direction of both the U.S. and world stock markets is up.
If you invested a dollar back before the Great Depression in the 1920s, then went through the depression, through World War I and World War II, through Korea, the fall of communism and nine very nasty bear markets, that dollar could be worth $5,000 or $6,000 today.
On the other hand, if you just kept up with inflation, today your dollar would be worth about $14.
So here's the bottom line: stocks over long, long periods of time outperform inflation and that's your real enemy. The second major enemy is longevity. The biggest fear people have today is running out of money before they run out of life.
If you're in your 50s or 60s today, you have a 25 percent likelihood of living into your 90s. If you're at least 55 today, your average life expectancy is 85. So when we think about investing, people think far too short term.
We've got to start thinking long term because your two biggest risks are longevity and inflation. And the only investment over long periods of time that is liquid and deals with both longevity risk and inflation risk is common stocks. It's as simple as that.
So you've got to live with the good, the bad and the ugly. But the key is when things get ugly, as they are now, not to run for the hills. You can't do that.
When stocks are cheap, as they are today, people try to get out. People are really happy to buy stocks when they're expensive, when they're going up. It's precisely what we shouldn't be doing. You want to load up the truck when stocks are relatively cheap as opposed to when they're relatively expensive.
But most people buy high, then the minute stocks start going down as they are now, people sell their position and they have what's called the heartbreak of stock market investing.
The only way you can deal with that is if you eliminate the emotion of the stock market and you think very, very long term. You turn off the television and you don't listen to all of that stuff because it really is just background noise. Ask yourself where are stocks going to be five, 10 or 15 years from now. If someone put a gun to my head, I'd say they're probably going to be higher.
So this represents a buying opportunity. If you're a disciplined investor, it's a great time to buy.
Should people consider restructuring investments in IRAs, 401(k)s and other longer-range retirement accounts?
Absolutely not, other than they should continue to invest. If they are a 401(k) investor, then they are probably dollar cost averaging, which is simply committing the same amount of money every month to the same positions.
The beauty of dollar cost averaging is that when stocks are cheap, as they are now, the same amount of dollars buys more shares of stock. When stocks are expensive, automatically you are buying less shares of stock.
What people misunderstand is that we're in the business of share accumulation, not price accumulation. He or she who gathers the most shares at the end of the day is the winner because stocks ultimately pay dividends, and the more shares you have the more dividends you earn on your stocks.
So if you're committing $300 a month to your 401(k) investments, doesn't it make a whole lot more sense that your $300 buys more when stocks are cheap because you accumulate more shares?
Now admittedly it's painful because your overall position has dropped dramatically. But if you take a long-term view, stocks will snap back and you've accumulated more shares at cheaper prices.
The other thing I tell people approaching retirement is that you need to have in your overall portfolio the ability to weather four years without hemorrhaging your stock positions. In other words, what are your monthly expenses and do you have enough in pension, Social Security and other sources that you can go 48 months without tapping your stock portfolio to live on. We haven't really found a time in U.S. history where stocks haven't snapped back dramatically in 48 months from their lows.
Based on history, will the stock market ultimately rebound or settle in at levels below where they were when the latest economic downturn took hold last year?
It will ultimately rebound. We don't know how long that's going to take, but history shows that markets generally rebound very, very quickly once they hit their lows. Typically, they rebound in 18 to 24 months and reach new highs.
Now, I'm not suggesting that's going to be the case this time because we've had a lot of fundamental issues that are somewhat different than in the past.
But that's just been history. When we look at troughs from highs to lows and rebounds from bear markets, they rebound very quickly. And if you're not in the stock market, your miss out on that opportunity.
The question isn't when to get in or out of the market, it's being in the market.