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Stock Market in Sharp Decline, Stocks on Sale?

This article was written by in Investing. 31 comments.


Because I believe this economic crisis will end within the next few years or sooner, I took today’s 777+ point decline in the Dow and 8.8% decline in the S&P 500 as a sign that the stock market, as a whole is on sale.

I opened an individual brokerage account at Vanguard after market hours today, in which I invested the minimum $3,000 in VTSMX, the Total Stock Market Index Fund. The trade will probably be effective at the end of business tomorrow, but I’m not sure if I’ll get today’s price (which has not been set yet) or tomorrow’s price. If I get tomorrow’s price, I might miss gaining from a rebound that the stock market might experience tomorrow.

Market timing is risky, but investing right after relatively large drops is more likely to be an opportunity in the long run. The $3,000 is not money marked for retirement, it is from money set aside for some of my more intermediate goals.

Are you taking advantage of the stock market decline? Is it too risky to try to time the market right now?

Updated February 6, 2012 and originally published September 29, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 31 comments… read them below or add one }

avatar Bryan

Cramer thinks the dow could drop below 9000.

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avatar UH2L

I transferred $2,000 in my 401K from stock funds to bonds (at a slight loss) last Friday and I’m glad I did. I was going to try to buy some stock funds towards the end of the day, but the Fidelity 401K site was overloaded and they had technical difficulties. Amazingly though, with the three main indexes down 7%, 9%, and 9%, the wide variety of funds I have probably only went down about 4-5% on average. Those Emerging Markets ones keep tanking though. I’m not sure exactly why they do worse than our domestic stock funds.

I say go with bond funds like inflation protected ones and stock funds that buy stocks that give dividends.

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avatar Yana

I do think it is too risky to be timing the market right now, although under normal circumstances I would consider this a sale. I don’t think economic recovery will be quick, or at least not quick enough for this household, as we are not so young. We can’t plan to wait longer than 10 years for our funds. Taking into account the political upheaval and the previous effects of September 11th on the stock market, I am sufficiently worried that I plan to get (mostly) out tomorrow morning. If we were 30, it would be a different story, but we are in our late 40s.

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avatar Marion

I’m in my early thirties, I’ve got a healthy emergency fund and surplus funds set aside for investing. I’m bullish on America and the future of this economy. We’ll have a sh*tty recession over the next 2-3 years but after that we’ll bounce back and probably find a new bubble to inflate. In the meantime, you’re right – stock prices are falling and it’s a great time to enter on the ground floor.

But where? That’s my quandry. Index funds? Mutual funds? Stocks? I’m young and can take some risks. The future is wide open.

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avatar Luke Landes ♦127,490 (Platinum)

Bryan: Cramer is more interested in ratings than providing sound financial advice (and he admits it). Nevertheless, looking past his hyperbole, he may be right. And if it does, I’ll buy then, too. :-)

Yana: I hope that if you get out tomorrow that you haven’t sustained any major losses over the course of your investing.

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avatar Todd

I plan to do a similiar thing with money I had on the sidelines that I will leave for a long while. (10+ years) Stocks ARE on sale. The markets are at their lowest in 12 months. Will they continue to go down? Very likely but no one knows how far.

So…. I will still do some dollar cost averaging. I may not split the full amount over 12 months but probably 3-6 months. This way I spread out the pain somewhat if there is a continued drop and take advantage of any deeper discounts.

One thing people only staying on the sidelines have to remember is that you invested in the market because you believed in it. This might however be a good time to evaluate how much risk you are willing to tolerate (seeing the current drop in your portfoliio). If you believe, keep buying on the way down. If not, you shouldn’t have invested in the first place and any future money should be put in something much less risky.

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avatar aa

If you are buying, do it with dollar cost averaging or you’ll be crying all the way to the ultimate bottom.

Even chart fool knows next is 10,000, Cramer’s right, it’s 8,000 after that.

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avatar Velvet Jones

I’m not buying more stocks. I’m sticking with my monthly 401k contributions. I’d rather have more cash right now.

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avatar Glymmar

I’m looking to buy some “Market Discounted” stocks, but I’m not convinced now is the time to pick them up. I believe that things are only going to get more “interesting” in the new year. I would suggest caution when investing on the down market days. Save some powder for the future. I do hope that the bail out currently on all the news channels eventually passes in some form, but I consider it too little, too late. The current bail out plan needs to be followed up by at the least 3 more “fixes” for the current economic ills. Alas, I suspect that the Fed is hyper-focused on the banking and credit crisis to pay any attention to the other sharks in the water.

Good luck with you recent investment.

Brian ~aka Glymmar
http://adollaradayquest.blogspot.com/ (remove this link if it’s not appropriate)

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avatar ABC

If your order was taken before 4:00 pm est then it should get the end of day price – if not then you get tomorrows price.

I would strongly suggest in the future that if you want to time the market this precisely, then buy an ETF instead of an index fund – since ETFs trade like shares you will get the market price when the trade is executed.

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avatar Marion

Sorry to comment twice but when I got home I was watching the PBS show and they were focusing on the DC bailout failure. One of the panelists mentioned dollar cost averaging and I Dogpiled it and found a great article on About.com (if you don’t already know what it is – I didn’t – it’s a great summary!) and now to find several other posters have mentioned it makes me think it’s a strategy I should test out. Thanks guys!

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avatar Keith

I was thinking the same thing, but Cramer is the ultimate contrarian indicator.

It’s going to get worse, but I’m banking on a short term pop so I purchased 100 shares of SSO(s&p 500 proshares ultra etf) in my gambling account today after the 8% haircut. If all works out I’ll be dumping it for a 5-10% gain in the next few days(easily doable as it uses leverage to double the movement of the S&P)

I’ll start dollar cost averaging down soon, but it doesn’t feel like we’ve hit max pain yet. 35% is a good solid recession. This is probably going to be a bit worse. The S&P and Nasdaq are off 30% right now so we’re getting there.

Scary times.

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avatar Kevin

I added to our IRAs today, and we will get the closing price tomorrow. I didn’t add a ton due to this, but figured I have 30+ years to worry about it if I’m off by a few percentage points.

I would also have encouraged you to get the ETF. Why not? Lower costs over the long run and trades like a stock. You could guarantee what price you pay tomorrow without having to wonder.

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avatar PT

I was suprised to see this post from you Flexo. Bold move. I think it’s smart though and worth the risk.

“The $3,000 is not money marked for retirement, it is from money set aside for some of my more intermediate goals.”

That’s the point that should be bolded. Most people arent’ in your position and should just sit tight and save cash.

Plus, you’re young and don’t have dependents (I think) which adds to your ability to “justify” this type of move. I’ll be watching to see if it works for you. Good luck.

I wish I had the cash right now to do the same.

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avatar fofy21

Add one more vote for DCA.

Most people feel like the bottom is still a little ways away. Even Flexo said he felt the crisis would end in the next few years or so.

Even though the stocks are on sale now, I think most agree they will be going even lower in the near future.

DCA allows you to buy over a period of time and take advantage of continued drops in the market while letting you buy stuff now in case the price rises earlier than expected.

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avatar klerg

I’m not putting any extra $ in right now but I am putting quite a bit in right now and am sorta/kinda participating in the sale. I’m putting 15% of my salary into my 401k and maxing my Roth IRA, the end result being that I’m putting 21% of my salary away for my retirement. No debt but my mortgage so I can do this.

Starting next year, I’ll be DCA-ing both my Roth contribution and a Vanguard account as well, the latter being used for wealth building. If the market doesn’t turn around by then, I’ll be able to by some more stocks on sale as well. But the truth is, I would rather see the market turn positive before next year.

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avatar Transcendental Success

I lost about $40,000 in paper wealth over the last week. I invested more yesterday. You need to have money in play when the stocks go up.

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avatar Chris

You can definitely find bargains. But look at the stock’s fundamentals. Sun Micro was a dog before, and it’ll probably remain one. Amazon, which is also down, will soar again some day, but still may never pay dividends. If they have good products that you believe in, they probably still do.

So don’t just buy whatever’s on sale. Shop with glee, but only what you can believe in. Remember, you’re investing in a company.

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avatar Michael Campbell

I’m sticking to my plan – transfer cash to the market (22% bonds, rest mixed int’l and domestic index funds) when I get my paycheck. That happens tonight, so will do it tomorrow. Did I miss the rock bottom? Maybe, maybe not. I *DON’T* have 30 years to make up the loss, but I have 10-15, which is good enough for me to not worry about it.

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avatar Dan

Thankfully, I was sort of slacking on my 401 contributions this year, so I doubled my contributions for the rest of the year. I wish I could contribute enough to get all the way to the maximum limit for 2008, but I’m moving in a few weeks and need some liquid dollars besides my emergency fund.

I’ve still got $1000 of room in my 2008 Roth, but didn’t hit the button yesterday. If there’s another down day this week, I might have to finish off the Roth contributions for the year.

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avatar weev
avatar Kyle

I’m just continuing my monthly DCAing. All my extra cash goes into the market every month anyway. Sometimes it’s more than others, but my emergency fund is a bit over 12 months’ expenses now so I don’t need any more cash on hand.

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avatar Kimberly

I put an extra $5,000 in yesterday and got yesterday’s pricing. It wasn’t money I’ll need for a long, long time so I thought it was worth it.

I don’t trust Cramer’s opinions so much. And every person I know who works in the field has a different opinion from each of the others (and readily admits that it’s a crapshoot what will actually happen).

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avatar jim

I had some funds in my Vanguard account sitting in an MMA waiting for the right opportunity, it’s long term money that just hadn’t found a home yet… I put it in to the 500 Index yesterday after close. As nice as the 3% pop has been today, who knows what can happen and I’m not counting any eggs, chickens, or even the coop for another year or two.

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avatar Yana

I pretty much agree with this article by Brett Arends: http://tinyurl.com/3fvjnu I sold off the majority of my stocks, and feel relieved, even though I really had mixed feelings about it. The uneasiness I feel about the current state of affairs was greater than my desire to hope for the best for my investment plans. I have to feel confident in working toward important goals, and I don’t currently feel that way in this area. There are too many unknowns at this point.

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avatar Mike

Correct me if i’m wrong. If the problem happened because of easy access to too much credit, and then the inability to pay back that borrowed money, isn’t BORROWING SEVEN HUNDRED BILLION more dollars the exact opposite way to proceed?

No bailout, let the companies fail, let’s learn a lesson from this. Let’s acknowledge and take responsibility for our mistakes. Let’s live within our means.

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avatar Chad

I was able to take advantage of this major drop in stock market, only because it happened when it happened. I had my Budget for this month set to put my monthly investment chunk into my mutual funds in the last week of September. So investing with the market drop was just blind luck. the market smiled on me when it was investment time. I am debt free and renting right now, 6 months of emergency cash in a MMA, I have 4 actively managed stock funds in my Roth, and 3 Index Stock funds in a taxable account all funded every month with my surplus money after all my bills are paid. All my invested money is money I dont need so even if i lose every dime, its no different than if I would have drank it up at a bar, devoured it at a restuarant, or bought some overpriced piece of junk I dont really need. However, history shows me that the market always comes back, so down the road.. this invested money will grow over time.. only to become a larger chunk of “unneeded” money that I can spend however I choose or just leave it there and let it keep growing.

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avatar kitty

@Mike: ” ” Correct me if i’m wrong. If the problem happened because of easy access to too much credit, and then the inability to pay back that borrowed money, isn’t BORROWING SEVEN HUNDRED BILLION more dollars the exact opposite way to proceed?”

I don’t believe you understand the severity of the current problems. All credit is not created equal. There are bad mortgages that got us into this mess, but there are legitimate needs for credit that businesses have for everyday operations like giving you the money you want to withdraw from a bank or paying your salary. Do you think banks keep your deposit in a vault earning nothing while paying you interest because they like you? They don’t, right? The money is invested in their business i.e. they use it normally to give loans to businesses, student loans, mortgages, etc. What happens then do you think when a lot more people come to withdraw money then to deposit in a short period of time? As now, for example, when everyone who has over 100K in one bank, and even some of those who have less try to withdraw money? What according to you they are supposed to do? Say, oh we cannot pay you today, we’ll wait until next month when we get payments on our loans? You wouldn’t like it, would you? What banks do is to borrow money from another bank at a low interest rate, then repay when they earn money. This interest rate is normally at 2%, but now it is at 4%. Not only that, the banks don’t want to loan to each other because they are afraid and because the cash now is more precious to them, but also because there are fewer banks. So banking industry cannot operate normally and even sound banks may be at risk. The banks are also reluctant to lend to businesses, even good businesses with good balance sheet, good history and legitimate needs.

What do you think a transportation or a construction company does when they need money to pay people salary to do the job, but will not get paid until the job is done? They borrow, pay people, get paid by customers, then repay the load and invest profits back into business. Similarly your company, may not necessarily get money from its customers just in time to pay your salary. Since you are so against credit, do you expect businesses to just keep all their available cash in checking accounts earning nothing just waiting to pay your salary? Then they couldn’t operate or make money.

Right now it is very difficult for companies to get loans. The credit market is frozen. So businesses suffer. If this continues many businesses may not be able to pay salaries. Care to guess what they’ll do?

Then there are people who wouldn’t be able to get mortgages even if they have a nice down payment and can easily afford it because the banks aren’t willing to learn. Only the rich will be able to go to college.

This is not about bailing out a few bad banks, it is about the whole financial markets and ultimately about our jobs. Also our 401K – are you enjoying this year so far? How low do you think your 401K will go if good companies that have nothing to do with financial industries start failing because they cannot get credit.

” No bailout, let the companies fail, let’s learn a lesson from this. Let’s acknowledge and take responsibility for our mistakes. Let’s live within our means.”
Sure and who cares about all those bank tellers and computer programmers and … who also lose their jobs when these companies fail. Then other companies fail those that had nothing to do with this crisis. Then your company may not be able to pay your salary…. Get the idea?

What living within our means has to do with the possibility of a total collapse of a financial system? Will a “lesson” help you pay your bills if you lose your job? And I don’t mean for a few months, I mean for a few years as if we have this collapse, it’ll be a while because there are jobs available. Will it help your 401K get back what you lost (unless you sold a while ago).

As to what I am doing now. If the bailout is not approved, I think the market will crash badly. So at the moment I do nothing. I have cash, but I am not willing to increase the percentage of my assets I have in the stock market. I might look at my portfolio, sell some stocks which I don’t think have good prospects and buy others. But I am not sure yet what to do.

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avatar UH2L

Kitty,

If only our government could explain it so well. I’m in basic agreement, but we did need provisions to prevent rewarding of the most guilty individuals. I’m not sure if that was accomplished.

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avatar Sarah

I maxed out my 401K contribution just in time for last Monday’s drop, and most of it is going into stocks. I also moved personal savings into my mutual funds this week.

Thank you for this post, Flexo. I think this is an opportunity too, but family and friends think I’m crazy. If I am, then at least I’m in good company.

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avatar Jared

IMHO equities should not be your first choice for intermediate savings goals. Especially considering the current level of market volatility, which is high by historical measures.

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