Many people investing in the stock market are asking themselves when will it return to more normal trading patterns.
The answer, of course, is no one knows anyone who tells you different is probably trying to sell you something.
Looking back to more normal times leads one to the conclusion that there are no such things as normal times for investors in the stock market.
For example, the stock market, and I'm using the Dow Jones industrial Average for this comparison, hit an all-time high on October 8, 2007.
Following this pinnacle, it began a slow but steady trend downwards until spring of 2008 when the wheels came off.
The Dow plunged for almost 12 months with a few upward ticks along the way. The index bottomed out at around 6,604 about a 7,400 point drop.
That point was reached in March of 2009 and the Dow began a slow but steady march upward through the middle of 2012. At that point it had still not regained its previous high.
While the climb from the bottom was impressive, it was still a climb from the bottom and not really like earning new ground.
So what are investors to make of all this?
First, it is clear the stock market remains as unpredictable as it has always been. The advent of very sophisticated investment products has not changed that dynamic.
Indeed, the financial crisis and resulting collapse of the stock market was fueled in large part by products developed by the "best and brightest" of Wall Street. These products proved as flawed as the people who invented them.
Secondly, quality (core) investments remain the best defense against a roller coaster stock market. They are not immune to events such as those in 2008, but they do weather the resulting storm better and are among the first to advance when economic conditions improve.
Long-term investors are best served by focusing their portfolios on core holdings and sticking with them as long as the company qualifies as a core holding.
A core holding would be a mature company with
- Reasonable debt
- Abundant free cash flow
- A strong moat or competitive position
A stock that can be bought at a discount to its intrinsic or fair value
While these companies do not typically soar through the ceiling when the economy is expanding they also don't fall into the deepest valley when the stock market takes a nosedive.
The worst mistake long-term investors can make is watching a hot new stock shoot up rapidly in an expanding market. If you want to risk a small portion of your portfolio on potentially high-growth companies, understand that many of the companies that fit this description collapse when the economy takes a turn for the worse.
It is gut wrenching for any investor to watch the market collapse as it did in 2008. The temptation is to pull your chips off the table and headed for safer ground.
However, if you have a strong package of core holdings, you are better off staying in the market and waiting for the turnaround rather than pulling your money out probably a loss and then trying to buy back in as the market goes up.
A company identified as a core holding today may not be so tomorrow, so long-term investors must constantly review their holdings for slippage in key financial metrics.
The other important issue is time. Give yourself enough time so that when you need to sell, it is at a time of your choosing.
For example, if you were retired or nearing retirement and needed to cash in your stock, 2008 would not have been a good time to do so.
Begin looking five years before you need to sell at the stock market and the economy. This will give you enough time to, hopefully, sell when it profits you, not when you have run out of time and need cash now.