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Ouch! Hey ... Stop It!
Market pullbacks, though they are to be expected, are never easy to endure. They test an investors moxie, as well as their investment philosophy. Am I doing the right thing? Should I sell ... or buy?
There are some common sense tools and strategies that, while admittedly won't guarantee you success, may help you improve your odds ... and sleep better at night.
Invest with a plan. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s would have been avoided if individual investors had created their own investment plan for achieving long-term specific goals such as retirement or a college education. For example, someone who can reach an investment goal by earning a modest average annual return is less apt to jump into higher-risk investments than someone with no plan except to always “go for the highest return.”
Smart investors draw up an investment policy statement that specifically outlines realistic return goals, what types of investments they will and won’t invest in, what mix of investments, and so on. This IPS serves as a reminder of their goals and strategies, and guides them through market declines and restrains them during boom times.
Stay invested. Panicked investors bailed out of the stock market or drastically cut back. Yet missing out on the stock market gains during the early stages of recovery can dramatically reduce returns, and the longer you wait, the more you miss out.
According to a study by SEI Investments of 12 bear markets since World War II, investors who either stayed in the market through its bottom, or were fortunate to enter at the bottom, saw the S&P 500 gain an average of 32.5 percent (minus dividends) during the first year of recovery. Investors who waited at least three months before returning to the market gained only 14.8 percent.
Diversify, diversify. Investors chased hot tech stocks in the late 1990s and got badly burned come 2000 and 2001. The Nasdaq lost 39 percent of its value just in 2001, and another 21 percent in 2002. Investors also overloaded on company stock, frequently with poor results.
Meanwhile, real estate investment trusts, which performed poorly in 1998 and 1999 when stocks were booming, had banner years in 2000 and 2001, performed so-so in 2002, and had an excellent 2003 and 2004. Bonds also returned well during the bear market. By adhering to your investment policy statement and spreading out your investment portfolio, you usually can reduce risk, minimize losses, and take advantage of the next “surprise” winners.
Hold realistic investment return expectations. As investors painfully learned, those high double-digit annual returns of the late 1990s-one year the Nasdaq jumped 85 percent-aren’t average. Average annual returns for the past 75 years have been around 11 percent for large-cap stocks and 12 percent for small-cap stocks, and many observers believe stocks will average three to four percent below those averages during the coming decade.
Sleep at night. Investors’ tolerance for risk tends to track the market-aggressive when the market is hot, timid when it’s down. But risk tolerance should reflect your overall investment needs, investment horizon and how much market volatility you feel comfortable with-regardless of what the market is doing at the moment. Again, a realistic investment plan should keep you focused and help you sleep.
Avoid ‘rearview mirror’ investing. Investors tend to focus on the immediate past. When stocks are booming, investors assume they will always boom. When stocks begin to slide, they fear they will slide forever. Instead, look out the front windshield at the long term.
Seek professional help. If we’re talking about your serious money here, there’s too much at stake to wing this or approach it as a hobby. Earning an extra point or two a year and/or avoiding big losses can add up to hundreds of thousands of dollars over the years.
Have questions? Don’t know where to turn? Call or E-mail right now for a complimentary initial consultation. LongView, Inc. is a privately owned and operated independent financial planning an investment management firm. We offer absolutely no in-house or proprietary products.
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