Educating, Protecting & Empowering the Investor

This must be cold and flu season; especially for world stock markets. It seems they picked up a doozie of a sniffle last week as we saw broad selling off everywhere.

 

Actually looking at the numbers which show the Dow off 16% for the year and international markets faring poorly as well, you’re probably thinking heck, I could have done better with a CD. And you would be absolutely correct. Today’s rates on 7 and 9 month CDs are over 4% today.  I have also noticed that fixed annuity sales are the most popular investment today. A fixed annuity is like a CD with tax-deferred interest.

 

Investors are running away from this bear market and seeking “under-the-mattress” type safety. And why wouldn’t they—no one likes to lose money, right?

 

Maybe you have looked at the returns on your investments — maybe your 401k has seen little or no growth for over a year or so. Maybe you’re getting disgusted of the whole “stock-market” thing and ready to throw in the towel.

 

But stop and think before you do anything. Stop before you make the worst and most common mistake most investors ALWAYS make.

 

Give and Take

 

Investors have to accept that in order to achieve higher returns the investment process must include bear markets from time to time. This is the “give” part. You must be involved in the economic cycle in order to reap its gains, and like setting sail over the ocean requires the possibility of foul weather, you’re ship must be in the water in order to arrive in your new location. In order to be safe, your ship must be well constructed so you can survive and arrive and reap those gains. Arriving and succeeding is the “take.”

 

So far, by the way, this latest decline is a very typical bear market. Actually, except for the persistent negative headlines and the high volatility, this bear market is no worse than many that had preceded it.

 

The Big Mistake

 

Remember the nasty markets between 2000 and 2002?  By the time 2002 came along the stock market plunged so many times that it scared the heck out of everyone. Your 401k statement looked awful and your mutual fund managers looked stupid. You may have thought: “I would have done so much better in a CD.” Many came to that conclusion and sold all of their stocks putting the money into CDs and/or money markets.

 

That was the big mistake. If you were one of those who made that mistake, you did the very worst thing you could ever do. You forgot the one most important lesson experienced investors know.

 

Markets, like economies, are cyclical. Expecting markets to rise and keep rising is unrealistic and dangerous. Just like being on a roller coaster, thinking as you hit bottom that the coaster won’t turn upward is plain wrong. It’s no different with your long-term investing. Yes, no one knows when the markets will turn up, but you can be assured that business conditions will improve and the market will lead those changes, acting in part like a forecaster and in part like a barometer. From March of 2003 until mid year 2007 stocks rose every year. Those that invested, or at least stayed put and diversified appropriately, would have done better than any CD or money market.

 

The same holds true today. Be diversified among many different types of assets. We call them asset classes, like large companies, mid and small, international–including developing regions like Asia– some bonds, maybe some commodities and some gold, etc. This should yield better results over time than hiding out in CDs. I’m not against short-term investments like CDs. They fill the need of keeping your short-term protected. CDs and money markets are good for funding shorter term goals like putting money aside for taxes, or tuition, or a down payment on a house. These are good reasons to keep your money safe and short-term. For your long term needs, however, these investments will hardly keep pace with inflation, and you may find that for all your efforts to keep everything safe you put yourself at more risk over the longer term.

 

Please heed my words here. After 28 years of practice I have witnessed numerous ups and downs, each one having its own frightening characteristics, and this one is certainly no different.

 

Keep you money separated between short and long-term needs. Invest the long-term money in a diversified way (there’s nothing wrong with keeping a little of your long-term money in cash in a bear market). But only get your short-term money into CDs or money markets.

 

Be the smart investor for once. Don’t make the Big Mistake.