Those sitting on cash saved from summer internships are probably glad they did not invest in the stock market at the beginning of the school year.
Even after Tuesday’s rally — the second largest single-day point gain in history of the Dow Jones Industrial Average — the Dow has lost over 20 percent in the months since the start of classes and at points has been down almost as much as 30 percent.
That means for every $100 invested in “the market” on day one of classes, less than $80 today remain. At that pace, the investment would be down to less than $10 by the end of the school year.
With that type of introduction, it might be difficult for many to heed the advice I’m about to give.
Right now is the best time to start investing.
Warren Buffet has recently championed the cause of stocks, claiming that irrational fears have driven stocks below their long-term values.
But despite the huge drop in stock prices that Buffet points to, there is nothing concrete to indicate that this is the bottom, just as there was nothing to indicate in October 2007 that the market had peaked.
Consider, as an illustration of this point, the stock market crash of 1929.
From Sept. 3 to Nov. 13 of 1929, the Dow declined almost 50 percent from a peak of 381.17 points to a trough of 198.6 points.
At the time, it would have been easy to declare that the market had reached the bottom. And in fact, six months later, in April 1930, the market peaked again at 294 points.
Yet on July 8, 1932, the value of the Dow was 41.22, an unthinkable 89-percent decline from the September 1929 high and a pretty lousy outcome for anybody who’d taken the advice I’m offering now in November 1929.
But let’s say you had decided to invest on Nov. 13, 1929. And let’s say you’d watched your money get cut into a fifth by July 1932. Where would you be today?
For every $100 invested, by market close on Tuesday, you’d have $4,565. And that’s after the recent subprime catastrophe which reduced what had been $6,952 exactly one year earlier.
This doesn’t adjust for inflation or taxes or the opportunity cost of that investment, which just sat in account somewhere for almost 80 years. But the point is that even with some really bad market timing, there’s money to be made in the stock market — if you’re willing to take a long-term approach.
And, if you ask me, a long-term approach is exactly what we should all be talking about.
In a country of citizens recently forced to reevaluate our “buy now, pay later” attitude, maybe a turn away from myopia isn’t such a bad thing. Maybe we should start saving more than the $2 per $1000 in income that the average American saves, according to a mid-summer government report. And maybe, most important of all, we should stop allowing unprecedented short-term market volatility to shake our confidence from investing in what is irrefutably the greatest economy in the history of the world.
Don’t forget that the best time to buy stocks is not when the markets are riding high, but when they have reached their lows. And more to the point, think not about what stock prices are going to be tomorrow, but think what they might be five, 10 or 20 years from now, when the efficacy of stock investing validates itself once again.
Alex Wolf is a junior in Berkeley College and an economics major.