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The Only Smart Bet In A Market Of Chaos

Posted: Nov 21, 2008 09:08 AM by Will Ashworth

Filed Under: ETFs,Recession,Retirement

Tickers in this Article: BKE, GPS, LIZ, TMW

The reality is that the markets are such a mess right now no one knows what is going to happen and most importantly, which stocks are going to be the stars of the next decade. The conundrum is that it's also critical to be in the markets when they bounce back. If you're stuck on the sidelines, you'll be depriving yourself of serious growth, perhaps of the once-in-a-lifetime kind.

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The way to solve this problem is the SPDR Dow Jones Wilshire Total Market ETF (NYSE:TMW).

What's The Wilshire Total Market ETF?
Originally this exchange traded fund (ETF) was created by Wilshire Associates in 1974; Dow Jones co-branded the index with Wilshire in 2004. The fund seeks to replicate the DJ Wilshire 5000 Index. It's managed by State Street Global Advisors, and it uses approximately 1012 holdings to mimic the index. It is the most broadly based index available; critics will suggest it's too broad, but in times of uncertainty it's sensible to spread your bets. For those who have less to invest, you might consider the mutual fund equivalent (Vanguard and others have U.S. Total Market Indexes) or buying quarterly to reduce the hit on commissions.

What Have You Done For Me Lately?
It's difficult to tell what U.S. stocks are going to do once America makes its way through the current recession. The S&P 500's annual return between 1997 and 2007 was 9.39%. That's a good 2% lower than the annual return for both the 40-year period between 1967 and 2007 and the 80-year period from 1928 to 2007.

More puzzling, the S&P 500 hasn't had a 30% annual return since 1997. Put another way, 2008 will be this decade's eighth consecutive year without a 30% return. In the 1990s, there were three, in the 1980s also three, with the best decade since the 1920s being the 1950s with four. That certainly sets an ominous tone. Are we to believe that high-octane returns are no longer possible? Many out there subscribe to this theory. If you are one of them, my idea is not for you. (Learn about the best benchmark in the world for large cap stocks in Index Investing: The Standard & Poor's 500 Index and The ABCs Of Stock Indexes.)

Pundit Guessing Games
A big portion of pundit air time right now is being spent guessing where the market bottom lies. Are we there yet? Are we to feel more pain? Like picking the winners of every Sunday's NFL games, it has become one giant sport. The problem is that we're talking about people's retirement funds, not their "fun" money. The consequences of poor decisions are far more serious and lasting.

How crazy are these times? Forty-two percent of the stocks in the Russell 3000 index are currently trading under $10. That's more than at anytime in the 1990s. Two bucks will buy you a share of Liz Claiborne (NYSE:LIZ), and you'll get change back. In September the stock was near $20. Buckle (NYSE:BKE) is currently trading around $15, and it's doing well. In today's market rationale, if Buckle deserves a valuation of $15, I shudder to think what price Gap (NYSE:GPS) should trade for. As for the DJ Wilshire ETF, it is currently trading at its lowest point since inception in October 2000. Only one other time in its eight-year history has it dipped below $60 and that was in 2003.

The Simple Strategy
Investors need to first commit to a fixed amount of money to invest on the last trading day prior to a new month and then decide on the time frame for carrying out the program, whether it be 12, 18, 24 months or longer. You buy every month taking the highs with the lows, this is called dollar-cost averaging, and it removes the difficulty of trying to guess the exact bottom of the market. Once you're through your set length of time, you'll need to decide what type of buying program to implement moving forward. That's up to you. Personally, I think it's the simplest way to take advantage of a correction that could continue for awhile.

If you went back and bought $1,000 Wilshire Total Market ETF for 24 consecutive months from 2003 and 2004 (first purchase on December 31, 2002) - the last time it was trading at its low - the average price paid per unit would be $69.09. After that, the ETF didn't fall below that level until October of this year. That's almost four years where it traded for a profit. Now it's back in the same place it was in 2003, probably lower. Investors who dollar-cost averaged the last time around would be very happy, which means this is another opportunity to cash in on an inevitable upswing without trying to pick winners or guess the exact bottom of the market. (To learn how to do it right, read Dollar-Cost Averaging With ETFs.)

Bottom Line
I take no solace in providing this suggestion. I love investing and would like nothing better than to take a few homer run shots here, but I just don't think anyone knows where to place their chips this time around, and for that reason, I believe we all need to consider spreading our risks.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

Filed Under: ETFs,Recession,Retirement

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