by Archie M. Richards, Jr.
August 6, 2007

Stock prices have crunched. Perhaps you've noticed.

As of 8/3/07, the Dow has fallen to 13,182. In my opinion, that's it; the decline is basically over. Prices will rise from here. For the reasons stated in 2007's first column (dated 1/1/07), this will be an excellent year for stocks.

It's already an okay year. In 7 months, the Dow is up almost 6 percent. The remaining five months will be humdingers on the upside.

My investment choices (see the website) have proven themselves. Among the exchange-traded funds of U.S. stocks, big growth (symbol VUG), of which I recommend investing 15 percent of a portfolio, have fallen the least - 6.6 percent from the July peak. Small value stocks (VBR), of which I recommend only 3 percent, have fallen the most - 13.1 percent.

Yes, the ETF of real estate investment trusts (VNQ), for which I suggest 20 percent, has fallen 26.3 percent from its February peak. But long-term bonds (TLT), for which I also suggest 20 percent, have risen 7.1 percent from its June bottom.

No investment approach is perfect. Stuff happens. Double diversity is the best approach. This means that each investment is diversified among many stocks via index mutual funds or exchange-traded funds. Each investment is also concentrated in only one type of security whose price action differs from that of the other types. Limiting volatility lessens the inclination to sell when things look bad, as they do now.

On a related subject, Cathy writes, "Following your suggestions, 20 percent of my portfolio is invested in Vanguard's exchange-traded fund of real estate investment trusts (VNQ). You've said that bad times don't remain bad. But from what I've read and heard, it could be late-2008 before the market recovers. Do you think I should cut my losses now and buy again after things settle?"

After things settle, Cathy? The stock market is never settled. When one problem resolves, another takes its place.

Okay, the big problem now is real estate. Yes, it could take 18 months to resolve the associated issues. But by that time, REIT (real estate investment trust) prices will have gone up. Stock prices move before the reasons for the trend become known to anyone.

During the week that started July 30, real estate problems worsened and most stocks plummeted. But the price of Vanguard's exchange-traded fund of REITs (VNQ) bucked the trend and remained about the same at 64.5. I expect VNQ to rise from here, long before the headlines about real estate problems subside.

If you happen to be rebalancing now, sell portions of those asset classes whose percentages of the portfolio are more than 20 percent higher than the intended percentages. Use the proceeds to buy more REITs. If I'm wrong about REITs rising now, buy more VNQ at the next rebalancing.

People who write and talk about investments are generally the most pessimistic when stock prices are on the bottom. Remember that investment sentiment does not lead stock prices up or down. Instead, sentiment parallels the price trends.

On April 30, 2007, I submitted a column (see website) saying that the American Institute for Economic Research (AIER) had predicted that the U.S. was headed for a recession. I advised not to sell because of this prediction.

Good advice. Despite the recent drop in prices, the Dow is slightly higher now than it was on April 30.

Since 1953, AIER has predicted a recession 12 times. On three of those occasions, no recession occurred. (This is a better record than that of any economist I know of.)

But AIER says that its recession predictions are for business reasons. One should not use them to jump in and out of the stock market. The organization has calculated that if a person sold the S&P 500 each time AIER predicted a recession and bought back the index when AIER forecasted a recovery, the investor would have lost 9.7 percent on average on each of the 12 occasions.

If you're troubled by the current television news, turn off the set. Don't sell.