When the stock market plunges, it's natural to want to do something, anything.
But when markets around the world started falling last week, the first reaction of stock-fund manager Craig Hodges was to do nothing. It wasn't until Monday morning, as the Dow Jones industrial average plummeted another 1,000 points in minutes, when Hodges had seen enough and was ready to make a move.
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He bought stocks.
"If you can find high-quality stocks that go on sale, take advantage and get in there," said Hodges, who bought shares of Owens Corning and other housing-related companies for his $2 billion Hodges Small Cap fund. "This feels like an overdue correction, and it may last longer," Hodges said, but he still sees many stocks as attractively priced.
Stay the course. It was a refrain that managers of mutual funds echoed again and again on Monday, even as the Dow fell deeper into a "correction," which is what traders call a drop of 10 percent or more from a recent high. Markets from Shanghai to Paris to New York are tumbling on worries about a sharp slowdown in growth from China, the world's second-largest economy. But fund managers say they still believe stocks are good long-term investments, and they're willing to stomach bouts of volatility like these in the interim.
In the Lake Oswego, Oregon offices of Jensen Investment Management, for example, there was no flurry of buying or selling, even after the Standard & Poor's 500 index continued to fall Monday following its worst week in in nearly four years.
"We haven't really done anything the last few days," said Eric Schoenstein, portfolio manager at the $4.9 billion Jensen Quality Growth fund and the $31 million Jensen Quality Value fund. "I don't think this is something that warrants a big reallocation, or moving everything to cash. Equities are still attractive. They're certainly more so than a few days ago."
The drop in stock prices has made stocks less expensive relative to the corporation's earnings. The biggest holding in the Jensen Quality Growth fund, medical-technology company Becton Dickinson, was trading earlier this month at 18.7 times its expected earnings per share over the next 12 months. The last few days' big declines mean it's now trading at about 16.6 times.
The market's big drops also show the importance of having a diversified portfolio, with a mix of stocks and bonds, and an investment plan. Stocks have historically tended to pay off for investors willing to hold onto them for a decade, but they can have big swings up and down in the interim. For investors who can't afford to wait years, bonds can provide less risky returns.
"Risk is not something that you react to after the fact," said Rich Weiss, senior portfolio manager for American Century Investments. "Risk is something that you prepare for ahead of time in your investment strategy."