Why I'm Buying Stocks

In the middle of the global panic that slammed U.S. stocks for an 18% loss in just one week of trading, I went online and put a big chunk of my cash into stocks. I want to tell you why.

I bought because I believed that the fear was excessive, even allowing for the severity of the credit crisis and likelihood of recession. I believed that some combination of governmental remedies, at home and abroad, would begin to stabilize the crisis within a few months.

Finally, as a believer in buying low and selling high, I thought that the 40% plunge in the market since the Dow Jones industrials peaked at 14,200 in October 2007 suggested that this was a fine opportunity to add to my stock holdings.

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Not Clairvoyant

On October 10, the day I submitted my purchase order and another big down day for stocks, I told readers of Kiplinger.com: "I don't have a crystal ball. I have no idea how much further the stock market might plunge. But if it continues to drop, I'll move more cash into it. It's called averaging down -- reducing my average cost per share -- which will magnify the upside gain when markets recover."

What did I buy that bleak week? I invested in virtually the entire universe of U.S. publicly traded companies, through a "total market" index fund. This gives me a sliver of some 2,500 companies, large and small, in every corner of American business -- everyday consumer products, heavy manufacturing, technology, energy, health care, food and agriculture, and yes, even housing and financial services, the most-shunned stocks of all. I'm not sure which of these sectors will fare better than the others, so I hedged my bets by buying all of them.

I'm no fan of trying to time the market, but last fall, I expressed in my writings great skepticism about the Dow setting new records week after week. I was forecasting a softening U.S. and global economy in 2008, so I warned against pouring a lot of new money into that hot market.

I did some judicious selling as stocks climbed, to build up cash reserves and be ready to buy the next time the market swooned, whenever that was. I waited a year. In the meantime, I continued to contribute the maximum every month to my 401(k) account. As the market drifted south, I put more than $1,500 a month into my normal mix of stocks and bonds, both U.S. and foreign.

I'm not looking for a quick gain. I was as surprised as anyone when the market skyrocketed on October 13, the next trading day after my big purchase. My total market index fund jumped 11% in one day -- an excellent gain for an entire year. The euphoria that day seemed as baseless to me as the excessive pessimism of the week before. Emotional extremes undermine good investing strategy. I expect there will be many more such volatile days -- of both surging and plummeting prices -- before this bear market runs its course.

Fortunately, I don't need this money in the next five years or so, which should be the minimum horizon for anyone investing in stocks. If your horizon is closer, you should tilt more heavily toward bonds and cash.

Great Opportunity

This worldwide slump will take a while to play out and finally end. But I believe that a few years from now, we'll look back on this grim period as one of the great buying opportunities of a lifetime -- like the Dow at 777 in the dark days of mid 1982, as the U.S. unemployment rate approached 11%. Or the days right after the crash of October 1987, when I also did a lot of buying.

The hardest thing for an investor to do is to go against the crowd, to keep a cool head when other investors are losing theirs. Perhaps a few years from now, I'll regret acting on the confidence that I still have in the resilience and ingenuity of the U.S. economy -- indeed, the global economy. But in 40 years of patient investing, I haven't been disappointed yet.

Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.