Remember This Earlier Post? Finishing Up A Wall Street Lesson From Ben Stein

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BenA little over a month ago, in late February and early March, the stock market in the United States took an 8% hit in a little over a week, a very painful drop for anyone with a stock investment. For me, this was a rather nerve-wracking time, as it was the first time I had significant stock investments during a market hiccup.

Right around that time (March 2, to be exact), Ben Stein posted a column at Yahoo! Finance entitled Keeping Your Cool In A Shaky Market. In short, the article basically encouraged readers to not sell like madmen because of the market hiccup, and actually offered some encouragement to buy.

On March 5, I took Stein’s advice and bought into the Vanguard 500, an index fund that matches the S&P 500 tightly. I bought shares in the fund at $128.89 a pop on March 5.

Yesterday, the Dow closed at a new all-time high, which reminded me that I had in fact bought heavily into a broad index fund just a little over a month before, so I went and checked the current value of a Vanguard 500 share. $135.67. In other words, my investment based solely on the principle of “buying low” saw a gain of 5.3% in a little over a month.

This doesn’t mean that I would buy immediately in every downturn, but that I saw no real reason for the previous downturn. There really is no sector that is truly overvalued right now (except possibly housing), so why would the market take a burp like that? As Stein points out, the market isn’t always rational. I saw it as a 5% off sale in the stock market, and a month later, it’s back to where it was.

So what did I learn from this?

My general investment principle is “buy low, sell when I need to.” I see no reason to really deviate from that general plan, and it seems to be working well. I generally buy a small amount each month (dollar cost averaging), but when there are opportunities like the one early last month, I’ll buy more. I also have no intention of selling anything until there’s a reason to sell it.

Watch what you invest. I keep my eye on what I’m invested in; I even have a spreadsheet that contains a bunch of data on the S&P 500 that I look at on occasion to see if there’s anything odd going on (like one sector bubbling up). For the most part, the numbers on this sheet have been roughly the same over the last year or two, and there’s no sign of a big bubble anywhere like there obviously was in stocks circa late 1999 and early 2000. I basically keep this as a “check” so that when there are little hiccups (or even big ones), I can feel fine buying in in the wake of the downturn, like I just did.

Don’t sweat it if you make a mistake. In other words, if you need the money to survive, don’t dabble in the stock market. I love seeing gains, but I also know that even if the market utterly collapsed, I wouldn’t be deeply worried because of that loss.

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8 thoughts on “Remember This Earlier Post? Finishing Up A Wall Street Lesson From Ben Stein

  1. This is actually one reason why I like investing in individual stocks. Since each is hand-picked and tracked, I’m very familiar with them and had a pretty good idea that the drop-off wouldn’t affect them in the long-term. Still, glad to hear that this worked out for you with an index fund–way to keep your cool.

  2. Almost entirely by luck, I ended up doing the same thing, Trent. I bought into a couple of broad Vanguard funds on 3/1 and 3/6, essentially because that’s about when the check cleared on a windfall I had been figuring out what to do with. Blind luck isn’t a bad way to start out investing, though it doesn’t exactly hold up as a sustainable strategy.

    I’ve seen gains almost identical to yours since then. It actually makes me nervous to see that kind of gain in so short of a period, but I’m new to this and have a lot to learn still. This experience has at least taught me that low periods in the market, short or long, CAN be opportunities.

    I appreciate the pieces of advice that you give, as well, especially the part about not sweating a mistake. I’m investing money I don’t need to survive, and I’m slowly learning to be comfortable with the fact that I’m still learning. (Your blog is a big help in that area, by the way.)

    Also, to previous commenter Bettsi: Welcome to the club! (The Club for People Who Are Just Starting to Pay Attention to These Things, or TCPWAJSPATT.) I just invest in index funds (and one lifecycle fund) through Vanguard: they have low costs, they get good customer satisfaction ratings, and I like their website. If I were investing in individual stocks, I probably would have used Zecco or something like that, but I’m not and may never be doing that, so I didn’t do a lot of research with that in mind.

  3. I opened my Roth IRA on March 6th: $5000 into Vanguard Target 2045. Now it’s valued at $5280.70. Haven’t looked up what made that all happen, but thirty-five or forty percent wouldn’t be bad for the year, not to mention six weeks.

  4. After China dropped 9% that day — and then had a bunch of drops, I bought 2 China ETFs and now they’re up about 13% since then (about a month ago).

  5. I’m happy people made money.

    Of course, we all know that Volatility is the name of the game in publicly traded equities. That 5% boost could disappear in a few hours.

    I’m not sure about “There really is no sector that is truly overvalued right now (except possibly housing)”. PE ratios are a smidge high at around 17. PB is on the overvalued end of the scale at 2.9. PE10 is still very high (check Shiller’s website for details, I think it’s in the 20s). Yields are, of course, historically low – which is another pointer to overvaluation.

  6. http://www.econ.yale.edu/~shiller/data.htm

    Shiller’s Feb PE10 data is 29.87. Historical bubble territory, although not near the 2000 bubble.

    Of course, these valuations are just estimates, but I’d encourage everyone to borrow Shiller’s _Irrational Exuberance_ from the library and see what this is about.

  7. Hmmm. My principle is buy when you have the money, sell when you need to. I don’t really pay attention to when I think the market is about to drop, and I don’t often have money available when stocks are on sale.

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