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Staying the Course
By Lee Matthew / Illustration by Robin McClannahan
STAYING THE course with your investment program in volatile times can be difficult, to put it mildly. No one likes watching the value of her 401k bounce up and down like a yo-yo.
Here are five time-tested strategies that have served investors well. Perhaps they will help you stay with your program during these tricky times.
1. Invest for the long term. Investment gurus like Peter Lynch and Warren Buffet are the first to say that no one can consistently predict market ups and downs in the short term. But what we can do is develop a long-term investment strategy based on wisdom gained by observing patterns over time.
Historically, time has reduced volatility. According to statistics published by Ibbotson Associates, over the past 71 years, the S&P 500's biggest one-year decline was about 43 percent. (The S&P 500 is an index of 500 common stocks generally considered to be representative of the stock market.)
However, that worst-case figure gets much smaller as the holding period gets longer. The worst five-year average decline over that same 71-year period was 12.5 percent. The worst 10-year average drop was about 1 percent. And when the holding period was 15 years, there were no declines.
So, in general, the historical data suggest that the longer your investment time horizon, the lower the probability of losing some or all of your original investment. (Remember, though, that while we often use historical data to make decisions, past performance is no guarantee of future returns, and an investor's shares, when redeemed, may be worth more or less than the original cost.)
2. Invest systematically. When you invest a certain amount of money on the same date every month, or every quarter, you are employing a defensive strategy that results in buying fewer shares when prices are up and more shares when prices are down. Over time, this will lower the average cost of your investment. In addition, investing systematically puts a consistent program in place for you, relieving you of the anxiety of having to decide whether any particular day or week is the "right time" to invest.
3. Don't time the market. It simply can't be done. The research is clear: There is no way to know for sure when the financial markets have arrived at their highs or lows -- except in hindsight, which is always 20/20!
If you try to predict how the markets will move tomorrow or next week, chances are you'll lose money. And you'll almost certainly develop an ulcer along the way.
4. Diversify your investments. Studies show that you may lower the total risk of your portfolio by investing in more than one type of asset. That's because different types of investments tend not to move in sync with each other all the time. If you already have investments, take a look at how they're allocated among stocks, bonds and cash; then think about domestic and international securities, and small as well as large companies. If you're just getting started, consider a well-diversified mutual fund with a good track record.
5. Consult your investment adviser. A reputable adviser can be a valuable resource when you're worried about the markets, or simply wondering if you're on the right track as you pursue your financial goals. The adviser can evaluate your plan (or help you put one in place), suggest changes and remind you of the importance of sticking to your long-term program.
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Lee Matthew is a financial planner in Albuquerque.
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SAGE November 1998
Don't let your mood swing with the stock market
The good news for women is that we do tend to stay the course better than men. According to research by the National Association of Investment Clubs and by major mutual fund companies, women seem to stick with investment decisions more consistently than men, even if it takes longer to get to the decision in the first place. However, women are also more cautious, tending to hide out in savings accounts much longer before taking the plunge.
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