“I’ve found that when the market’s going down and you invest wisely, at some point in the future you will be happy. You won’t get there by reading ‘Now is the time to buy.‘”
—Peter Lynch, Investment Guru and Former Manager of the Fidelity Magellan Fund
I can’t blame investors for being frustrated these days.
The message from Wall Street is different day-to-day. “The market has hit bottom”…“No, it’s a sucker’s rally”…“Get back in the stock market, so you can be there for the big rebound”…“Nope…stay away…it’s a false bottom.”
It’s no wonder why investors can’t decide what to do. So they remain cautious—and they should be.
But that’s exactly why it’s important to examine the conditions that lead to “false bottoms” and “sucker’s rallies”; and examine the conditions that lead to genuinely vibrant financial markets. Once we understand what the landscape looks like and what path to take that will take us to a clearer horizon, and subsequently better investment decisions, the better off we’ll be.
Right now, the landscape looks uncertain. For the first quarter of 2009, Wall Street sent two disparate messages to investors. We’re down…but get ready, because we’re going back up.
That’s pretty much what happened during the first quarter of ’09. For the entire quarter, the Dow Jones Industrial Average plunged 13.3 percent, the S&P 500 slid 12 percent, and the Nasdaq fell 3.1 percent. But March hosted a big rebound in the stock market, and again in April.
The mixed numbers reflect the realities of the global economy right now. For the short-term, we’re still dealing with major uncertainties in the global banking markets. Housing foreclosures continue to rise unabated. And Washington is, for the first time in history, firing auto industry CEOs and telling carmakers what kinds of vehicles to build. Add on top of this the swine flu.
These are historic events that are still relatively fresh in investors’ minds, and they’re major contributors to the sense of nervousness among investors—sort of like the feeling you get when you tip your chair back and are about to fall over, but haven’t yet.
It’s my view that we need to regain our balance, right ourselves, and take control over our long-term financial futures.
History tells us that the stock market will rise again, and probably substantially so. Consequently, to calculate exactly what time to get back into stocks is a bit of a “Catch 22.” Get in early, and run the risk of potentially falling through a “false bottom” and losing more money. But staying on the sidelines, historically, has meant potentially big losses in your investment portfolio because you missed out on the rebound. Ask any trader or fund manager and they’ll tell you the real money is made early in resurgent financial markets—not after the herd has thundered in and drove stock prices even higher.
What’s the difference in staying in the markets and jumping back and forth? In the 30-year-period from 1963 through 1993, investors who kept money in the market earned an average annual return of 11.8%. Those who missed the 10 best days during that 30-year period only gained 10.2%. And investors who were on the sidelines for the 30 best days of that time period, only earned an 8% average annual return. Lastly, those who missed the best 90 days during the 30-year-period only earned 3.3%.
Thus the validity of that old Wall Street maxim: “You make most of your money in bear markets—you just don’t realize it.”
That’s why it’s important to have a plan on investing in bear markets. Even a disciplined, regular-investment approach—as simple as it sounds—can be effective. Or, working with your WrapManager Wealth Advocate, find a suitable financial level where you’ll feel comfortable getting back into the market and jump back in once that level is reached.
Wall Street professionals call that tactic “pre-commitment”—getting ready to invest in the stock market when your gut tells you it’s the right time to do so. Is that time right now? Well, the big benefit of getting back into the market today and focusing on the long-term is that stocks are cheap these days. Major blue chip stocks are trading at half of their values in 2007, when this whole mess started. It’s no secret that many of these companies are well-managed, stuffed with cash, and well-positioned to excel over the long haul. Consequently, focusing on companies that are solid, stable, and that have products that are in demand is a good long-term strategy. Or, in “pre-commitment” terms, pick a stock price level and, once it hits, go ahead and buy the stock.
Of course, your own personal financial circumstances factor into your investment timetable. While stocks are cheap, and conditions on the ground slightly more favorable than they were six months ago, WrapManager is consistent in its belief that you don’t invest money that you can’t afford to lose. So if you’ve been struck down by a lost job, a bad mortgage situation, or another economic setback, make sure you have enough savings to get you through the rest of this financial downturn—having six months of savings is a good place to start. Once you have your personal financial situation stabilized, you can focus again on your investments over the long haul and sleep better at night knowing you’re taking concrete, sustainable steps to rebuild your investment portfolio.
That’s the big picture view, and I feel it’s a solid one.
But it’s okay to be cautious, too—just not too cautious. I do not think we are in a “bear trap” but expect more volatility ahead in the short-term, as the three pillars of global finance: financial institutions, housing, and the auto industry, still have some cobwebs to shake out of the system. Sooner or later, those cobwebs will be gone, replaced by a more robust, sustained business environment, one well-suited for a stronger stock market.
But that’s really beside the point. Like Peter Lynch wisely said, investors shouldn’t focus on what’s happening today—they should focus on what their investments will lead to down the road. Hockey legend Wayne Gretzky used to call this “not being where the puck is, but where it’s going to be.”
In other words, plan ahead, have a vision, and have a plan to get to your financial goals.
Simple advice, but highly effective. Besides, if it’s good enough for Wayne Gretzky, then it’s good enough for me.
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