October 02, 2018
Tuesday PM

(SitNews) Ketchikan, Alaska - The market is making some people nervous. Maybe it will crash, they say. Maybe the economy will turn down and go sour, they say. Maybe the bull market will end and we will be in a bear market, they say. Maybe the time to get out has come, they say. Maybe our planet will get whacked tomorrow by a giant asteroid that will destroy all life on earth, too. This kind of thinking is a waste of time and just fosters stress and anxiety. If this reflects your thinking, let’s ask the right questions and get some answers.

If the market is making you nervous, what should you do? Should you worry, get out, dump your stocks and buy bonds, go to gold or hunker down with cash? What should you do?

How about getting some factual information first and studying before you make an uninformed or emotional decision? How about learning what history can tell us about how the market actually works? Studying the long historical records of the market is where to start. Getting the facts before making an important financial decision is just common sense, but for some reason, when it comes to money, some of us leave our common sense at the door and rely on our feelings…..of fear, greed, anxiety and other emotions that trigger bad financial decisions. There is a better way, however.

What does history tells us? Let’s look at the facts.

01. Since the crash of 1929 to 2017, the broad market of US stocks (small, medium and large size companies) combined has enjoyed an average annual return of just under 10%.

02. For almost 100 years, US stocks have earned between 9% and 12% per year on average, in spite of negative years, market crashes and economic recessions in the US.

03. When measured in 10 year increments, the market has been positive for 28 of 32 of these 10 year periods. Of the 4 decades that were negative, 3 of them were in the 1930s.

04. People have not lost money in the market if they hold for 10 years or more.

05. A dollar in 1930 is the equivalent of $20.64 today (2018, at 3.5% inflation).

06. $1000 invested in 1930 at an average annual return of 9% would be worth $1,965,766 today, even after all of the ups and downs for those 88 years.

07. Blue chip stocks have produced positive annual returns 81% of the time going clear back to 1970. Blue chip stocks are very large US companies.

08. An aggressive portfolio of the S&P500 (the 500 largest companies in the US) had an average annual return of 8.58 % over the 25 year period from 1993 – 2017, in spite of 3 bad years in a row, in 2000, 2001 and 2002 (-9.06%, -12.02% and – 22.15%).

09. An aggressive portfolio lost 37% in 2008 but earned 26.49% in 2009, in 2010 earned 14.91%, in 2011 earned 1.97% and in 2012 earned 15.82%, ending up with a positive return of 22.19% for the years following the tech crash of 2008.

10. A moderate portfolio lost less in 2008 (25.1%) and recovered as well, earning 24.85%, 11.7%, 0.77% and 13.79%, ending up with a positive return of 26% for the 4 years following the tech stock crash of 2008.

I could bore you with more facts but I will stop here, because I am sure by now that you get my point. The market goes up and down, but patient investors who do not try to time it, or get in and out when they get nervous, reap great rewards. The key is to think long term, like 10 years or more. Personally, I think in terms of 30 years, even though I know at some point I will not be here in 30 years.

So, even though the market goes up and down, and has bad years sometimes, it has a history of more good years than bad ones, and not many decades of any losses at all, except 3 times in the 1930’s, over 80 years ago. Experiencing a bad year in the market is sort of like a “speed bump”. It slows you down briefly but does not have a big impact in the long run.

Are there some methods of investing that will calm your nerves? Sure, there are. The first, which I have already mentioned, is to become educated, informed about the facts. The second is to think long term and commit to 10 years or longer. There are also other ways to reduce the jitters, like making the act of investing a habit. The easiest way to do this is to set up an automatic investment plan. For example, you can have money sent directly from your bank account to your investment account monthly. If you have a company sponsored retirement plan, like a 401-K plan, you are already doing that, because with every paycheck, you have the opportunity to make a contribution out of your pay. These repeated, small and regular investments become habitual. Developing this habit is a powerful tool in your skill set, so take advantage of it.

Once you decide to invest every month, or every paycheck, decide on the reason(s) you are investing. This means you will need a specific goal, such as “retirement income equal to half of what I am earning today”, or whatever is appropriate for you. Vague goals don’t work, by the way. I once had a client say that his goal was to “retire early with lots of money”. After I finished laughing, I asked him how much money was “lots of money”. He joked back and said, “Oh, maybe a million dollars”, thinking that was out of reach. However, I did a few calculations and responded back to him that he could certainly reach the goal of a million dollars. I knew this was true because I had enough information about his income and assets to project the future value of the assets he already had and the additional contributions he was, in my opinion, able to make over the years ahead, to actually reach that goal. He was a little surprised, but stopped joking and became very focused on the plan that we then discussed. Your goal may be less than that, or more than that, but whatever it is, be specific. You won’t reach a goal if you don’t really know what it is.

Another way to safeguard your invested dollars is to use a strategy called “asset allocation”. This means to choose several categories in which to invest, and each one should be different than the others. This type of diversification is broad in scope. It can be geographic, such as investing in differing parts of the world, such as the US, the EU and Asia. Or it can be by type of investment, such as US stocks, foreign bonds and real estate. It could also be by size of the company, such as large cap (big companies), mid cap (medium companies) or small cap (small companies) companies. Many investors prefer to select different categories by sector of the economy, such as health care, finance, tech, industrial etc. You can mix these and create a balance, such as 20% of your money in 5 differing categories. This strategy is very effective at reducing investment risk, so it should make even very nervous investors feel better.

In summary, being nervous is only being human, but it should not prevent you from the common sense goal of investing for your future security. Start by becoming better educated and informed, then set a goal and stick to it. Develop the habit of investing so that it becomes automatic and when you select investments, use the strategy of asset allocation to reduce risk and increase your potential for good returns. You can do all of this on your own, or with a financial planner to advise and guide you. Whichever way you choose to proceed, just make sure you do proceed. Get started, ignore the speed bumps and focus on the goals in front of you. I have confidence that the outcome will be positive, so get started today.

On the Web:

Read More Money Matters Columns (Archives) by Mary Lynn Dahl

SitNews ©2018
Stories In The News
Ketchikan, Alaska

 

Articles & photographs that appear in SitNews may be protected by copyright and may not be reprinted without written permission and/or payment of any required fees to the proper sources.