There is a lot of doom and gloom being spouted about the economy. I see it every time I switch on the news, or turn on the radio or open a paper. Banks are announcing record losses. Car manufacturers are asking governments for bailouts. House prices are falling fast. "Wall Street is plummeting. 12 years of gains have been wiped out", trumpeted this morning's news in America. On the radio tonight, one commentator described the stock market as "carnage".
(You know things have reached mass hysteria levels when the conversations you overhear in the pub or in the work canteen all sound the same: "Should I get out of the stock market? It keeps going down - should I get out now before it gets worse?" "Oohhh, you don't want to leave your money in the stock market. Shares are dangerous.", etc, etc. It's as if the sky has fallen in.)
The FTSE 100 index has fallen to levels not seen since the Second Gulf War started in 2003. It closed at 3512 today, down over 3000 points since its most recent peak of 6732 in June 2007. What should your average investor do?
Me? I'm going shopping. I'm going to buy the index.
As far as I'm concerned, if you drip feed your money into an index tracker, it's the perfect time to buy. Here is my logic: from the time I started watching the stock market as a teenager, I've witnessed at least three major stock market declines, including the "crash" of October 1987. After each decline, the market recovered, usually far exceeding its previous peak before the next great decline. I want to buy a share in that recovery growth.
Certainly, companies are failing and that is why I wouldn't try to pick individual companies to invest in right now - the world's rapid decline into recession and the credit crunch turns even normally healthy companies into far more risky individual investments. It is much harder to spot which companies will fail. However, investing in an index tracker spreads that risk across all the companies in the index (100 companies for the FTSE 100, 500 companies for the S&P 500). Most companies in the index will stay in profit; most companies will survive; some companies will even thrive.
Of course, the above is just my opinion. Feel free to argue with me. However, I am putting my money where my mouth is: this afternoon, I set up a regular purchase of a FTSE 100 tracker.