Published August 2004
Taking
a ‘time out’ from investing can be costly
If
you’ve been investing over the past decade, you probably have good reason
to be confused about the stock market’s performance.
After all, from January
1995 through December 1999, the S&P 500 Index (an unmanaged index that
cannot be invested into directly) gained an average of nearly 29 percent
per year. But from January 2000 through December 2002, that same index
dropped, on average, more than 14 percent per year.
The market rallied
in 2003, but results have been mixed in 2004. As stocks repeatedly move
up and down, what’s an investor to do?
First, you need to
realize that, over the short term, the stock market has always been volatile.
But over the long term, the stock market has always trended up. From the
beginning of 1926 through the end of 2003, stocks, as measured by the
S&P 500, showed a compound annual growth rate of 10.4 percent, according
to the market research firm Ibbotson Associates. (Keep in mind, though,
that past performance does not assure future results.)
Of course, your investment
horizon may be a bit shorter than 77 years. So, as you invest in stocks,
you may wonder if there isn’t some way to “duck out” of the market during
“down” times. Theoretically, it’s a great idea — but in practical terms,
it’s not really possible. Why? Because no one — not even the most widely
known market “experts” — can accurately predict when a down market will
turn up and when a strong market will head south.
Consequently, if
you take a “break” from investing, you could miss out on some good opportunities
for gains.
Want proof? Let’s
look at some numbers:
Suppose you began
investing in the stock market (as represented by the S&P 500) at the end
of 1953. If you had stayed invested until the end of 2003, you would have
earned a 7.9 percent return. But suppose, along the way, you had pulled
out of the market for short periods of time. If you missed just the market’s
top 10 days during that 50-year period — just 10 days — your return would
have shrunk to 6.74 percent. And if you missed the top 40 days, your return
would have eroded to 4.25 percent.
Want to see a shorter
time frame? Look at the 10-year period from the beginning of 1993 through
the end of 2003. If you had stayed invested the entire time, you would
have received a 9.07 percent return. But if you missed the top 10 days,
you would have just gotten a 4.05 percent return — and if you were out
for the top 40 days, your return would have been a negative 5.81 percent.
(All these returns exclude reinvested dividends and transaction or commission
costs.)
Clearly, it can pay
to stay invested. Still, all the long-term numbers in the world probably
won’t make you feel better if you’re dismayed over your monthly brokerage
statements. How can you ease this type of discomfort?
You can’t control
market volatility. But you can blunt its impact by diversifying your investment
dollars across a wide range of assets — stocks, bonds, government securities
and certificates of deposit. While diversification doesn’t eliminate market
risks, the more diversified you are, the less susceptible your portfolio
will be to market downturns that hit one asset class particularly hard.
And there’s one more
thing you can do: Keep your focus on the future and your long-term goals.
That’s not always easy. It takes discipline and real commitment to keep
investing during turbulent times — but the ultimate reward may well be
worth the effort.
Eric Cumley is an
investment representative with Edward Jones Investments at 1201-C SE Everett
Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is
an NYSE-member investment firm with more than 9,000 locations nationwide.
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