Staying the course may prove prudent

At times like this, it can be wise to heed the advice of investors who survived, even thrived, by hanging tough during prior economic crises.

One of the more colorful tidbits is attributed to 19th century banker Baron Rothschild, who supposedly urged associates to “buy when there’s blood in the streets.”

These days, figuratively speaking, blood is everywhere – in the AIG collapse, the nationalization of Freddie Mac and Fannie Mae, the run on money market mutual funds, the unraveling of the nation’s top investment banks, the government’s financial bailout effort, a possible new contraction in consumer spending and a softening of the global economy.

It’s hard to resist the urge to cut and run, but in truth now might be the time to take a stand. Here are some arguments for staying the course and possibly even looking for opportunities:

•The pronounced anxiety we’ve seen of late is unusual and might signal a bottom.

The fear/greed pendulum has swung so sharply to the former that people are thinking about and doing bizarre things. Adviser Jeff Young at First Financial Equity Corp. in Scottsdale, Ariz., tells of a client’s neighbor who wants to bolt a safe to his closet floor to hoard cash. Young calls that one of several recent signs that anxiety has reached extreme, and probably unsustainable, levels.

Indeed, stock market volatility this month hit its highest readings since September 2002, and that turned out to be a great time to invest.

On a more rational note, Young cites Warren Buffett’s decision to invest $5 billion in Goldman Sachs as a promising vote of confidence.

“I am hanging tough for my clients,” he said. “They are just looking for someone to give them reassurance.”

•Various costs and taxes could make it even more painful to sell now.

A good example involves withdrawals from traditional Individual Retirement Accounts and workplace 401(k) plans. Pulling money from these types of accounts before retirement age (59 1/2) requires you to pay income taxes on the proceeds and a 10 percent early withdrawal penalty. You face all that and could wind up selling out near cyclical lows.

Conversely, you usually receive subsidies – tax deductions or 401(k) matching funds, for example – when you continue to invest.

•If history provides any clues, the stock market slump is at least halfway over and probably much further along.

The stock market, after the bailout defeat in Congress on Sept. 29, was down 29 percent from its highs hit last October. That’s not unusual. The past 10 bear markets saw the Standard & Poor’s 500 index slump about 23 percent on average.

In terms of timing, the current downturn is nearing its one-year anniversary. On average, downturns last about 413 days, said Karl Huish of Tribeca Financial in Mesa, Ariz.

Yet bull markets tend to be stronger in terms of percentage changes than bear phases, and they usually endure longer.

“The average bull market lasts (about) three years, while bear markets last a little over one year,” Huish notes.

Speaking of patterns, September traditionally has been among the weakest stock market months, with summer and early fall the softest seasons. That, too, might point to improvement ahead.

•Stock prices will start to recover before the economy becomes noticeably better.

Investors trade on the expectation of what lies six to nine months down the road.

If you don’t think the economic climate will improve within that span, stay out of harm’s way. But if you do anticipate some clearing of the clouds down the road, now might be the time to get more aggressive.

The frustrating thing about investing is that you won’t get an e-mail message or tap on the shoulder announcing the actual turning point. By the time that becomes apparent, prices will have risen already.

Yet stocks invariably emerge from recessions with solid rallies.