It wasn’t long ago that investors were lured by the siren song of instant riches. Market commentators and investors proclaimed a new era for stocks, one that would never decline again.
Now, doomsayers dominate – in some cases it’s the same people and publications that hyped stocks in the 1990s. “Forget equities and switch to U.S. Treasuries and Certificates of Deposits,” they suggest.
But, just as investors have learned that stocks don’t return double-digits every year; another historical lesson is that stocks don’t tumble forever either. If there was a lot of hype about running with the bulls, why would the hype around a bear market be any different?
The problem, say many financial analysts, is that investors tend to focus on the immediate past, instead of adopting a long-term view. When stocks were booming, investors assumed they would always boom. Now that stocks are sliding, the fear is they will slide forever.
It’s important to remember why you invested – or should have invested – in the first place. People should invest for long-term goals such as college tuition or retirement. “Long term” should be at least five years, preferably 10 years or more, into the future. Time and asset diversification can help you ride out the inevitable declines – even a long one – that markets go through.
Selling now would turn paper losses into real losses. In short, you could be selling at the worst time. In some cases, selling losers might be a smart tax move because you can use the losses to offset other taxable income. But the tax benefit could be limited, so employ the strategy judiciously.
Ask yourself, where would I put the money instead? Many money-market accounts, which are protected from loss of principal but not from inflation, are paying rates between 1 percent and 3 percent. The same for CDs and even two-year Treasury bonds.
Of course, those rates look better than declining stocks. But bear markets don’t last forever and many of the weakest investors have already left the market. The only way to participate in a market rebound is to stick with your investment plan. Some advisors are even telling clients with extra cash to buy stocks because they’re at bargain prices.
The key today and always is to decide what’s right for you , diversify investments and look long term.
When Best to Invest?
“Whenever you have the money” is the response from Sir John Templeton, founder of Templeton mutual funds.
Here are some reasons why people have avoided the stock market in the past 75 years: the Great Depression, World War II, assassination of President Kennedy, Vietnam War, record-high interest rates of 1980s, U.S./Iraq war. You can always find a reason to stay out of the market if that’s what you want.
But long-term trends point to compounded annual growth rates of as much as 15 percent. The question now is, was that growth an aberration? Perhaps, but market growth nonetheless is a documented historical trend, and that’s far more important than day-to-day events.
When you invest in any kind of security you face risks. The most obvious is losing money. But there are other kinds of risk as well – risks that affect any kind of investment – like the loss of purchasing power. But, putting your money under a mattress or even in a CD may not keep up with inflation or the additional tax erosion.
There are three main reasons why most investors fail to meet their investment goals.
1) They don’t have a plan.
2) They select the wrong funding vehicle – specifically, investments that don’t keep up with or outpace inflation and taxes.
3) They let emotions influence their decisions.
By investing a consistent amount of money, even small amounts, at regular intervals avoids the temptation to “time” the market. This is called dollar-cost averaging. It helps you balance purchases when shares prices are low versus when prices are high. This alone doesn’t ensure a profit, but it does reduce the price you need to breakeven.
You can always find a reason to stay out or pull out of stocks, but in investing as elsewhere in life, discipline has its rewards.
This column is produced by Financial Planning Associates, and is provided by R. Hutton Cobb, a Wachovia Securities financial advisor in Greenville, N.C.