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Tricky Times
By Lee Matthew / Illustration by Robin McClannahan
1. Diversify
2. Think long term
3. Invest regularly
4. Don't forget dividends
5. Remember that declines are natural
6. Talk with your
Lee Matthew is a financial planner in Albuquerque. She is an associate of Kathleen Winslow & Associates, LLC, and an investment adviser and Registered Representative, offering securities through Financial Network Investment Corporation, a securities broker/dealer (member SIPC). Kathleen Winslow & Associates and FNIC are not affiliated.
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SAGE December 1999
Should You Invest in a Volatile Market?
In recent months, substantial movements in the Dow Jones Industrial Average and other market indexes have been front page news on a regular basis. Fear of interest rate hikes, Y2K concerns, fluctuations in foreign markets and more all affect how markets behave, and the volatility probably won't subside in the coming months.
In this uncertain environment, many people are wondering how they should manage their investment program. It's scary to put your hard-earned money in an investment, however sound, only to watch its value bob up 
and down like a yo-yo. But short-term trading isn't the answer: Trying to outguess short-term market movements is essentially taking a gamble on the unknown.
So how should you invest in a volatile market? When times are tricky, it's even more important to remember the following principles of investing:
Different kinds of investments tend not to move in sync, so you may be able to lower the total risk of your portfolio by investing in more than one type of asset. If you already have investments, take a look at how they are 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. (Remember, though, that diversification does not assure a profit and doesn't protect against loss in a declining market.)
Time can be a great risk reducer. No one can consistently predict market ups and downs in the short term. But we can develop a long-term investment strategy based on wisdom gained by observing patterns over time.
Take large company stocks, for example. According to Ibbotson Associates, a publisher of statistical data on financial markets, the worst one-year decline in the S&P 500 in the past 73 years was about 43 percent. (The S&P 500 is an index of 500 common stocks generally considered to be representative of the stock market. It cannot be invested in directly, although some investment products are designed to mimic its performance).
However, that worst-case drop isn't so bad when you extend the time period: The worst five-year average decline in that same 73-year period was 12.5 percent. The worst 10-year average drop was about 1 percent. When the holding period was 15 years, there were no declines.
Since market ups and downs cannot be predicted, consider this simple but effective strategy: Invest regularly, no matter what the markets happen to be doing at the moment. This is a defensive approach that results in buying fewer shares when prices are up, and more shares when prices are down. Over time, this may lower the average cost of the investment.
Perhaps even more important, however, is that regular investing relieves you of the anxiety of having to decide whether a given moment is the "right time" to invest. You just do it.
When you invest in stocks or mutual funds that pay out dividends, you may choose to take the dividends and spend them, or you may reinvest them. If you use the dividends as a source of income, it's comforting to remember that historically, large dividend-paying companies have had a tendency to maintain their dividend payouts, so your dividend income may not fluctuate to the same degree as stock market prices. If you choose to reinvest the dividends, your reinvestment may help smooth out the volatility of rises and falls in share prices.
In fact, the relatively smooth upward ride of the past few years is unusual, by historical standards. Ibbotson Associates reports that large company stock returns have declined in 20 of the past 73 years. Long-term government bonds also fell in 20 of the past 73 years.
So you might say that periodic declines are the historic norm of the markets, and we have to find ways to live with the volatility. Again, time is on our side, since the longer the holding period, the fewer the declines.
According to Ibbotson's figures for the last 73 years: When the holding period was five years, large company stocks declined seven times; when the holding period extended to 10 years, there were only two declines.
Fifteen-year holding periods had no declines. It must be noted that stocks can be more volatile than bonds, which offer a fixed rate of return.
investment adviser
A reputable adviser can be very helpful when you're worried about market volatility. She can analyze your investments, evaluate your plan (or help you put one in place), and remind you of the importance of sticking to your long-term program.
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