Investors, Keep Calm and Carry On

Let's cut right to the chase: Although the stock market steadied on September 23, the past week's mini-crash had a different feel than some of the market's other recent meltdowns.

The last few dives had obvious triggers: the downgrade of America’s credit rating; the Treasury default scare; the first revelations of how deeply European banks are on the hook for the debts of Greece and other nearby nations.

The latest plunge was born of pure anxiety and shattered confidence. An Eaton Vance money-market-fund manager dropped by my office on the afternoon of September 22, just as the Dow Jones industrial average was down 500 points. Eric Stein, who was in Washington to visit institutional investors attending World Bank meetings, said the folks he was speaking with describe all stocks, no matter the caliber of the underlying company, as mere “risk assets.” And risk nowadays is a four-letter word.

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The past week saw a flight not only from U.S. and European stocks but also from emerging markets and commodities, even gold. Both the Brazilian Bovespa stock market index and Brazil’s currency are falling out of bed, although Brazil is nowhere near recession. Sellers are ditching bank and other financial shares and are wary of real estate even in China, where growth is slowing. Investors will surely suffer if the trend toward avoiding anything that smacks of risk continues to accelerate.

But all panics and cycles eventually run their course, and in that pattern lies the hope for better results from stocks, particularly those of large, high-quality, dividend-paying, U.S.-based multinational companies. The mad rush to buy dollars and Treasury bonds suggests that once the panic selling subsides and investors realize that 1.8% yields for ten-year government bonds make no sense, they will remember that a big slug of the world’s best companies are indeed based here and jump into our stocks with the same enthusiasm with which they lust after our Treasury bonds, despite our $14 trillion debt and our dysfunctional government.

If you own a diversified bundle of stocks and bonds, the best thing to do now is stay calm and carry on. If you contribute a few hundred dollars every month to a 401(k) or some such program, don’t stop now. And stick with your rebalancing schedule. If you normally rebalance at the end of a quarter, do your thing as planned on or about September 30. It will probably mean buying stocks and selling bonds (especially Treasuries) and that may be tough to do in this environment, but the idea is to sell the more-expensive investments and buy the cheaper ones.

I strongly discourage you from selling all of your stocks now with the idea of jumping back into the market when things look better. In the November edition of Kiplinger’s Personal Finance, columnist James Glassman quotes John Bogle, founder of the Vanguard Group of mutual funds, as saying that in his 50 years in the investment business he’s never met anyone who can time the stock market consistently well enough to make timing worthwhile. You probably won’t be the exception. (Also see our Special Report on “How to Be a Better Investor”; an important element of the package is a story designed to help us overcome the psychological hurdles that influence our behavior and often cause investors to do the wrong thing at precisely the wrong time.)

Getting back to this week’s 6.4% conflagration in the Dow, it’s clear that growing fear that the U.S. and much of the rest of the developed world may be slipping into a new recession lit the bonfire. The market had a few small down days, but it didn’t crack until Federal Reserve Chairman Ben Bernanke repeated what we all know: America’s economy is not recovering much, if at all, from the 2007-09 recession; new jobs are scarce; and business and consumer confidence is in the dumps. Bernanke gives many speeches and is testifying constantly before Congress. It’s a shame that traders treat each public address as a call to action and tend to overreact.

President Obama and Congress are not helping by seemingly offering a new economic or tax plan every week for fear of looking lazy while people are losing their jobs and the markets are shedding so much value. Of course, given Washington’s hyper-partisan atmosphere, none of these proposals stands a chance of enactment. But the smartest course -- and this is a view endorsed by people such as Eaton Vance’s Stein and economist Ed Yardeni -- might be to just sit back and let the economy and the markets do their thing. This is not a political statement endorsing libertarianism. It’s just an observation that we, as investors, would be able to make decisions more calmly and under less pressure if we let cycles play out and didn’t have to deal with the constant sturm und drang of volatile, seemingly irrational markets.

If I were buying a single fund right now, I would choose one that invests in blue-chip stocks (mainly American but not exclusively), pays a good dividend and doesn’t chase fads. Vanguard Dividend Growth (symbol VDIGX), a member of the Kiplinger 25, fits this bill. So does T. Rowe Price Equity Income (PRFDX), another Kip 25 fund.

As for individual stocks, the list of bargains is staggering. Four of the world’s best businesses -- Boeing (BA), Caterpillar (CAT), Deere (DE) and DuPont (DD) -- are trading just above their 52-week lows. Dividend yields that dwarf the interest payments from Treasuries are there for the taking. Utility stocks are yielding 5% and holding their value. The dividend yield on AT&T (T) is over 6%. That’s AT&T, not some Turkish telecom. (See STOCK WATCH: 5 Companies with Stocks that Pay More than Their Bonds for more on AT&T and other high-yielding stock picks.) Oil prices are falling, but my favorite energy-income investment, BP Prudhoe Bay Royalty Trust (BPT), yields 10% and is steadier than stocks such as Chevron (CVX) or ExxonMobil (XOM).