The FTSE is up 50%, but it's not too late to start buying.
"As stock markets slid in March, Judy Brady lay awake at night thinking about her portfolio. 'My retired friends who had all CDs and gold, and they were still making money, and my investments just kept going and going,' she said. 'I thought: I can't afford to lose all this.' So the 70-year-old retiree in Schaumburg, Ill., sold most of her stocks."
-- The Wall Street Journal, May 18, 2009
For 20 long months, the FTSE 100 slid from a 13 July 2007 high of 6,754 to its 3,461 nadir on 9 March 2009. By that time, this widely watched index of the UK's 100 biggest and best firms had lost close to 50% of its value.
Little wonder that people like Judy panicked, or that so many investors like her could not take the pain anymore, and sold at the bottom. The great wonder is that not everyone did cash out and swear off the stock market for good. And for those who stayed the course, this great wonder has turned into great good fortune.
Since hitting bottom, the FTSE 100 has soared 50% higher in just over seven months, leaving those who sold at the bottom lying in the dust.
But How Was I To Know?
You weren't. You couldn't. Whether you're one of the unfortunates who sold at the actual market bottom, or whether you simply failed to buy at the lows, you shouldn't beat yourself up just because you missed out on one of the stock market's great rallies. In truth, it's just not possible to time the market.
And even if you could time the market, there's no guarantee it would have made a difference. To paraphrase legendary US investor Peter Lynch: "There's only one reason to buy a stock (i.e. because you think it will go up), but there are many reasons you may need to sell."
Whether you needed to sell shares to pay medical bills, school fees, or simply living expenses as the result of an unexpected job loss -- no one's going to blame you for cashing out at the bottom.
Or maybe you're on a fixed income, and you depend on your investments to provide a steady flow of funds to live on. The past year has seen many companies we never thought of as weak forced to staple their wallets shut. BT Group (LSE: BT-A), HSBC (LSE: HSBA), and Aviva (LSE: AV) have each slashed their dividends by at least 30%.
If you bought a stock in reliance on the dividend it paid, and it then cut that dividend, then you no longer owned what you'd bargained for. It was surely time to sell.
The Best Reason To Sell
And then there's the best reason of all to sell: You simply weren't comfortable with the investment. If you had too much money at risk in the market -- and then that risk materialised -- then of course you needed to sell!
People need to be able to sleep at night. If you had so much of your net worth tied up in shares that their daily gyrations gave you insomnia, then there's no two ways about it. Those shares had to go.
So I repeat: Do not beat yourself up about this. The past is past, and the question today is much simpler: What do you do now?
It's Not Too Late
Now that you've lived through the market meltdown, I'll bet you have a much better idea of how much risk you can tolerate. Now it's time to invest up to, but not beyond, that limit.
First of all, set aside enough cash to keep you going through at least six months of living expenses, and don't push cash into the market that you're going to need in the next five years. Whatever's left is what you have available for investment. And as you've seen over the last four months, the stock market is the best way to increase the value of your investments.
Consider that while the stock market has lifted itself up off the mat for a 50% rebound, it's still more than 20% below its July 2007 high. To return to the prices of yesteryear, it will need to rise another 30%. That would suggest there remains plenty of upside left.
But How Do You Know?
Good point. After all, the highs we hit in 2007 were fuelled largely by low-quality profits in the financial sector -- excessive risk-taking at HBOS and Royal Bank of Scotland (LSE: RBS) to name two sources. Defunct financial houses like Northern Rock and Bradford & Bingley won't make a comeback, nor contribute a penny toward returning the FTSE 100 to its former glory.
But not all shares are Northern Rock. Whether or not the overall market surges to its former highs soon, some companies will revive and thrive.
At the risk of stating the obvious, these are the companies you want to own now. Companies with great name recognition, like Vodafone (LSE: VOD). Firms with wide, defensible moats around their business, like Unilever (LSE: ULVR). These are the sort of businesses that will build your wealth in the years to come.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
