he stock market has been alarmingly volatile lately, rising by hundreds of points one day only to fall sharply the next. The looming debt crisis in Europe is largely to blame — and the fear that Greece and other struggling governments will default on their loan payments has already scared many investors away from stocks and toward the relative safety of U.S. government bonds. Is it time for smart investors get out of stocks altogether?
Yes. Investors need shelter from the coming crash: One way to measure the value of the stock market is to compare it to the size of the economy as a whole, says Martin Hutchinson at Reuters. And the Dow Jones Industrial Average, at around 11,000, is 3,000 points higher than it should be if it had tracked with GDP growth since February 1995, the first time the Dow hit 4,000. In other words, stocks are overvalued. "That suggests a crash is more likely than a 'double-dip' recession."
"Stock market crash more likely than new recession"
No. Stocks are still the best investment: The dizzying ups and downs are enough to make investors want to abandon stocks, says Vanguard Group founder Jack Bogle, as quoted by Yahoo! Finance. But trying to time the market and get out before a deep slide is the "silliest" thing you can do. "The odds are just terrible and the process is costly." Stocks aren't dirt cheap, but they are a better deal right now than bonds. "They are still the place to invest."
"Stocks are still the best place to invest: Jack Bogle"
As always, the key is to diversify: The stock market has never been for "the faint of heart," says Chris Farrell at Bloomberg BusinessWeek. Historically, the extra risk has paid off because stocks, on average, have rewarded investors with 4.2 percent higher returns than bonds. But bonds paid 5.1 percent more between 2001 and 2011. That either means the rules have changed, or the S&P 500 is in for a 30- to 40-percent gain when things return to normal. Which is the smarter buy? "Just in case, diversify."
"U.S. investing: Are the best times over?"
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