Tuesday, October 18, 2011

The More Things Change....

Considering the American debt ceiling fiasco, all the political turmoil, a European debt crises, and unemployment at 9 percent, there are plenty of reasons to be concerned about the stock market and the state of the global economy. Consequently, markets have moved downwards since April as all these factors have been digested by investors. Investments within all asset categories have experienced increased and alarming volatility over this period. Naturally, investors and those close to retirement are concerned.

I decided to look at my previous articles to find a way to reflect on recent events; I didn’t have to look for long. Here is an excerpt from the first newsletter I published back in March of 2009:

How volatile is this investment environment? As measured by the S&P 500, the market moved more than 3% in either direction during a single day only once between 2004 and 2007. By comparison, the market moved at least 3% in one day 40 times in 2008. Further, moves of 2% to 3% occurred 28 times during the calendar year.

For those who see no end in sight for this volatile market, remember -- we have been here before! Between 2001 and 2003, the market moved between 2% and 3% an average of 20 times per year, and that was over a three year period! We then moved on to enjoy a relatively stable and profitable period between 2004 and 2007. Thus, history indicates that the increased volatility we are currently seeing in the market is not the "new norm" and we should expect volatility to subside at some point, creating a more reasonable investment environment for all.

I researched the performance of the S&P 500 during 2011 and found that the market had moved 3% or more in either direction only 9 times this year, and 4 of those times the moves were positive. Additionally, moves of 2% to 3% have occurred only 14 times during the calendar year. Again, I can look back and say “we’ve been here before” and point to another example of moving on to more calm and profitable times -- 2009 and 2010. In addition, by comparison, the volatility we’ve recently experienced is actually quite tame compared to market fluctuations we’ve experienced even recently.

The human mind has a unique way of interpreting events relating to investing hard-earned money. We always convince ourselves that current times are unlike anything that’s been experienced before and that today’s problems are more difficult and numerous than yesterday’s problems. The present never seems like a good time to invest and save – we always want things to settle down and be more stable before investing. Unfortunately, these are the feelings that are present in the marketplace 75% of the time. Even worse, if you wait for the 25% of the time when investors feel comfortable you have likely already missed the boat and are likely to have invested immediately after the market has experienced a profitable run.

This is the reason having a well thought out and devised investment strategy teamed with a long term approach is so critical to investment success. The mind of an investor will never make things easy. There will always be a reason for heightened fear or concern, a reason to sell or not invest. Fortunately, investment advisors can add tremendous value in overcoming these obstacles. Do you have an investment strategy? Can you write on a piece of paper exactly the logic used to determine why you hold the investments you currently own? Have you documented which elements of your portfolio are designated to provide income during various periods of your life? Have you established safe measures that will prevent you from selling in the middle of a panic and ensure you don’t end up buying high and selling low? A financial planner can help you answer these questions.

Too often we wait until the market has had an impressive run to feel confident putting our money to work. This is why having a sound investment plan can help you avoid making investment decisions with only a short-term focus. It is also why having a financial planner on your side to ensure you stick to a well-defined strategy during both good and bad times will ultimately maximize your chance of achieving your investment goals.


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