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September 5, 2010 |     |
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Newsletters
Steps to Survive Uncertain MarketsInvesting during times like these can be nerve-wracking. With the daily financial news driving drastic swings in the stock market, it is easy to forget that holding a diversified portfolio and keeping a long-term perspective are essential to successful investing. Don't Panic Market declines are a natural part of the investment process. In fact, since 1900 there have been 117 declines of 10% or more. History has shown that while the stock market reacts negatively to unfavorable events and news, it has always regained value over time. Long-term investors who have stayed invested have been rewarded for their patience even after significant market declines. It is a natural instinct to "follow the herd" when the market is declining and investors are selling at a rapid pace. Sometimes it is difficult to resist being overcome with emotion when investing. Understanding that declines are a natural part of the market cycle can help you endure the uncertainty and avoid the temptation to react. Keep in mind that even if you are retired and withdrawing from your account, you should still approach this with a long-term perspective since most retirees are planning to fund their retirement for up to 30 years or more. Don't Try to Time the Market The decline in the market and the accompanying declines in your account value can make it very tempting for investors to pull money out of the stock funds and wait on the sidelines in stable value until things improve. However, trying to move in and out of the market can be very costly because you never know for sure when the right time is to be back in the market. Uncertainty is always present so people who take this approach typically wait until the market has risen for an expended period before they get back in. As a result, they miss out on much of the rebound. Consider the example shown in the chart below. This chart illustrates that missing just the 5, 15, or 25 days with the greatest gains over a 20 year period (out of a total of 5,040 trading days) has a dramatic impact on the growth of your investment over the long-run. Keep in mind that many of the days with the greatest gains occur during or immediately following a down-turn. Most skittish investors are still waiting on the sidelines and won't benefit from these profitable days. This tendency to let the market dictate your investment decisions- to sell stock funds after a market decline and repurchase them after a rise in prices- is one of the most self-destructive behaviors in finance. The real key to making money istocks is not to get scared out of them. Review Your Portfolio When market conditions are changing, it's a good time to examine whether your portfolio is properly diversified to withstand these fluctuations. If your portfolio is diversified among different types of investments and takes into account your objectives, time horizon, and risk tolerance, we strongly recommend sticking to your plan. Most investors need the higher returns that stocks have historically delivered in order to keep pace with inflation and maintain their standard of living throughout retirement. However, because we expect that the stock market will go down as well as up, the portfolios recommended to retirees include a portion to the Stable Value Fund. The portion in stable value functions as a cushion so that not all of your account is fluctuating with the market. The key is to find the mix between stock funds and stable value so that you are able to tolerate the inevitable market declines. If you need assistance in evaluating whether your portfolio is properly diversified and appropriate for your situation, please feel free to call us at 800-223-7608. (Published: 7/31/2008) Back to Index |
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