By Kenneth J. Meszaros, CPA
We are in one of the toughest times when it comes to our investments. The terrible events of September 11 have shocked all of us and has caused a great deal of uncertainty, both in the investment marketplace and in our day-to-day lives.
Nevertheless, we need to return to our normal activities in order to return some stability in our lives. But how do we deal with the losses we have all seen in our investment portfolios? It is time to return to sound investment strategies, strategies that will help weather the volatility and lead to realistic returns.
Let’s start with a little review of history. There have been many crisis’ over the last one hundred years. Along with the events of September11th, there was World Wars I and II, the Great Depression, Korea and Vietnam, the Arab Oil Embargo, Cuban Missile Crisis, Double-Digit inflation in the 80’s, Market Crash of 1987 and assassination attempts on Presidents Reagan and Ford just to name a few. Each of these events was viewed at the time as creating both uncertainty and disruption on the capital markets as well as having the potential for an earth-shattering impact on our lives. Yet with each of these events, the market has recovered. Since 1900, there have been 69 years in which the market has shown a gain and 32 years for which it showed a loss. During those down years the markets average return was -13.22% while during the up years the markets average return was 22.46%. And since World War II there has only back-to-back market declines once, 1973-1974. The market has seen a 20% correction an average of once every 5 years and there hasn’t been a correction that large since the third quarter of 1990. From 1946 to 2000 there has been 10 corrections of 20% or more yet each time the market has recovered to new highs. Source: Dow Jones, Inc
So let’s get back to the present. How can we, as investors, weather the storm in the marketplace. It all comes down to a sound investment strategy that entails a long-term approach to investing, realistic expectations, patience, diversification and resisting market timing.
As I stated above, the market upside has occurred in 69 of the past 101 years.
That means that over time, the positives have out gained the negatives and while past performance cannot guarantee comparable future results, focusing on long-term performance will ease the short-term ups and downs. Set your goals not for today or tomorrow or even next year. Your goals should be set for your circumstances. High risk investments when you are close to retirement can be as bad as low risk, low return investments when you have 10 or more years to go before retirement. Remember why you are investing and what your goals are. There are going to be many bumps along the way but if you stay focused on your long-term goals it will help get you through the many unpredictable times.
What do you expect to earn on your investments? 8%? 10%? 20%? More than 20%? If you started investing in the 90’s your expectations may be unrealistically high. You cannot focus on the most recent returns. The 90’s saw incredible returns on the markets long bull run. How many of you remember the returns of the 60’s, 70’s and 80’s? Don’t look at what you’ve lost when the market takes a downturn, look at what you’ve made since you started investing. Focusing on the short-term returns can drive you crazy. Look at your performance over years and decades, not days or months.
Historically the market has provided a return of approximately 10% annually. When investing in mutual funds, look at the funds returns for 10 years or more. This may give you a more re-alistic view of what you can expect as a return on your investment. But you need to remember that with any investment, past performance does not guarantee future results. Source: own computations from published results.
Everyone wants to make a quick buck and from time to time many have gotten lucky enough to make the right investment at the right time to score a quick profit. Believe me, these have been few and far between. As good as it may sound, there is no quick payday when it comes to investing. I have to keep telling this to myself all the time and I work in the industry. Everyone has a story to tell and has the perfect stock to buy but in reality you need to research what you buy and be patient. Remember this is a long-term approach. The market will go up and the market will go down. Relax and let the market and time do it’s thing. How many of you have heard someone say „if I would have bought IBM, McDonald’s, Intel, etc… when it was available back in … I would be rich”. What are they saying? If they would have bought the stock 10, 20 or 30 years ago and held it, it’s value would have increased tremendously. A patient, long-term approach to investing to meet your goals will calm your market nervousness.
How many have heard the expression „Don’t put all you eggs in one basket”? This couldn’t be truer when it comes to investing. Where would you be today if you had all your investments in technology stocks or .Com’s? While they were the darlings of the late 90’s they have fallen out of favor with today’s investors. This type of faddish investing does not result in consistent long-term gains. Diversification may help you reach your goals. Sensible diversification allocates assets across a variety of sectors, regions, market capitalizations and economies and in a range of investment vehicles.
One way to achieve diversification is to invest in mutual funds. Even investing in a single mutual fund provides more diversification than purchasing a single stock.
Mutual funds offer investors ways to seek higher returns through more aggressive or specialized funds while maintaining positions in a variety of companies, industries, sectors or marketplaces thereby helping to offset market risks. You can be as aggressive or conservative as you want while matching your investments with your goals.
Resist Market Timing
When is the best time to buy? When is the best time to sell? If I knew that, I and my clients would be very wealthy. The problem is we don’t know when those market lows and highs will be. How many times do we sell only to see the market go higher and how many times do we buy only to see the market drop. So what do you do? You sit on the sideline waiting for that right moment to get into the market and while you’re waiting to make that decision, you may be missing some of the best single-day performances the market has to offer. The more you try to time the market, the greater the chance on missing these gains.
Why is it that the day after Christmas is one of the busiest shopping days? Because that’s when the sales begin. We just had a national tragedy, the market was closed for a week and when it reopened the market dropped. The stock market was on sale. How many took advantage of the bargains in the days since the tragedy? The market has nearly recovered from that event and those who bought have made money. Those who were invested and remained invested have nearly recovered. But people are quick to react to market turmoil and there are many people waiting to make a profit off someone else’s pessimism. Everyone has a reason not to invest and there are many reasons to sell but if you resist the temptation to time the market you will weather market volatility. Remember, it’s not timing the market, it’s time in the market.
There is always going to be market volatility. It takes a well rounded approach to investing to work through the market ups and downs. Investing is a long-term process. You can not worry about day-to-day or month-to month flu-ctuations. You need to remember why you are investing and what your goals are and give the market the time it needs to meet those goals. You have to be pa-tient and not react to every crisis’ that will occur. There are many people making money on other peoples pessimism. Be realistic in your goals. If you invest today expecting to make 20% per year you are setting yourself up for disappointment. Those days are past. There may be years when you will get those kinds of returns but there will be many more years where you will earn much less or even lose. Resist the challenge to time the market. A better ap-proach would be to invest a flat amount on a monthly basis. This dollar-cost-averaging approach will have you buying shares on a regular basis at different prices with a strategy to buy more at an overall lower price. Lastly, diversify your investments. A well diversified portfolio will weather market ups and downs and help you achieve your goals in a less risky manner.
Investing can be a roller coaster ride but with a sound investment strategy you can reap the rewards of our marketplace with much less stress. Consult your investment advisor to implement an investment strategy to meet your goals.
From the Editor:
Ken Meszaros is a CPA in Wheaton, IL specializing in business and individual accounting and tax services. He is also a Registered Representative of Terra Securities Corp. (Member NASD, SIPC) providing a full range of investment opportunities and advice in retirement planning, college funding, insurance needs, mutual funds and annuities for individuals and businesses. Investment Advisory Services are offered through Terra Financial Planning, Ltd., a Registered Investment Advisor.
Kenneth J. Meszaros, CPA
1119 Wheaton Oaks Ct
Wheaton, IL 60187-3051