Stock Market Blues. What….me worry? Absolutely not! By Christina Mae Olson, CFP®
(The first part of this article is pretty depressing. If you want to skip to the more upbeat advice part then go directly to the last half!)
The stock market keeps going down and down. The markets keep getting hammered. As of June 22nd, the Dow Jones Industrial Average (30 of the oldest and biggest US companies) is down 10.72% for 2008. The S&P 500 (a much broader and more diversified mix of 500 larger, so-called “blue chip” US companies) is down 10.24%. The NASDAQ Composite (the index representing smaller, more volatile companies) is down by 9.28%. These benchmarks will jump up a little whenever some good news hits the streets but recently tumble as fast as they jump. Political and economic news really influence the stock market: “our stimulus checks are working” or “OPEC agreed to produce more oil” or “Bush is on his way out” or “the end is near for the credit crisis.”
As I write this on 6/23/08, these three indexes are trading at multi-year lows. The Dow is at $11,748 (highest trade was $14,164 in October, 2008). The S&P 500 is at $1,306 (highest trade was $1,576 in October, 2007. The NASDAQ is at $2,359 (highest trade was $5,132 in March, 2000). Anyone with money invested in stock mutual funds and/or in brokerage accounts is affected by this. Many of us have IRA’s, ROTH IRA’s, employer retirement plans [401(k), 403(b), 457, SIMPLE, SEP] that are appropriately invested in a nice diversification of stock mutual funds (or annuity sub-accounts). Thankfully, we usually get quarterly statements from these employer retirement plans because the bad news comes just every three months. If you looked at your declining account balance every day you might just get freaked out by the dwindling balance.
Some people actually do look at their “portfolio” every day. This is a recipe for disaster. In my financial planning practice, I talk about “risk tolerance” with my clients. I ask questions like, “Can you sleep at night knowing that your account has lost value?” and “Does it bother you knowing your balance might go down before it goes up?” One very crucial psychological tidbit that financial planners must know is this: people hate loosing more than they like winning! Studies have actually shown that we would rather gain nothing than risk loosing a single penny. I’ve had clients declare they were “high risk” investors – that they can handle the ups and downs of the stock market – only to discover (during a down period) that they really were “mattress” investors. They’d rather keep their money stuffed in their mattress than lose any of it to stock market fluctuations. Of course, you realize you don’t actually take the loss until you sell and get out! A paper loss only looks bad – you don’t make it bad in reality until you sell out.
I tell you – from a personal investor viewpoint – I DON’T CARE! I know that the value of my IRA’s and employer retirement plans will go up again! I am not going to pull out my money just because we are in a down year. Historical returns for stocks and stock mutual funds are high. The average annual return for the S&P 500 – over the past 100 years (including the Great Depression and several recessionary periods) has been 10.89%. That’s a +10.89%. This factors in all the good years as well as all the bad years. My money would have lost 6.2% annually to taxes and inflation if I had kept it in my mattress. Oh, that would be very sad. I need my money to keep up with inflation (currently at 4.6% - depending on how you calculate it).
And another thing…my investments are very well diversified. I worry less about stock market gyrations in part because my investments are spread out between all styles of mutual funds: stocks, bonds, international and even cash. Diversification insulates investors from taking a hard hit in times like these. When one asset class tumbles – others remain stable.
Here’s another reason why I DON’T CARE: I keep investing little bits of money every pay period. This is called “dollar cost averaging.” In a down market this means my money buys more shares. When things do go up again – these shares will really take off and increase in value. Why? Because I was able to buy more shares on the cheap. For this reason, I actually LOVE and ENJOY the chance to invest/deposit money in my accounts during down periods.
What’s my advice for riding out the declining stock market? First, do not micro-manage your investments. Don’t try to pick the current “winner.” You won’t be able to do it. Don’t look at the value of your accounts daily or even weekly. Let it go. One bad day will overshadow the bigger picture and make you miserable. You don’t need that weighing you down. It’s better to get the news on a quarterly basis. It will work itself out without your meddling. Second, make sure you are well diversified. Don’t put your funds in just one type of investment. Third, stay invested. Do not get out. Do not sell. If you get out now – you are doing the opposite of “buy low – sell high.” Your losses are only on paper now. You won’t actually realize a loss unless you actually sell. Do not sell low. Don’t do it. Finally, BUY MORE NOW! Buy more shares of your mutual funds while they are undervalued. You will really be pleased when they take off. And, they will take off. Just you wait and see.
Chris Olson is a certified financial planner™ with a fee-only practice. You can reach her at CMOney@centurytel.net or (608)-525-9818.