Investing in the face of fear

Recent reports on various financial networks indicate the American public in general believes now is not the time to invest in stocks (equities). Currently, the S&P 500 index is ranging between 810 and 920 with a brief dip to 752.44 on November 20th. To put this into perspective, the index was at its peak in October 2007, 1,565.15.

The question is whether investors purchasing stocks in 2006 and early 2007 were correct, or are those not willing to purchase equities now correct? If the American public is correct now, then the index would be expected to be lower than the 810 level during the next twelve months. The problem though, it is the same group, the American public, who was purchasing equities in 2006 and 2007, and is not willing to go back into equities today.

While listening to Squawk Box, a CNBC financial TV program, one morning this week, Joe Kernen, one of the hosts of the show, stated “…they are going to want to own stocks when it is the wrong time to own them, the majority of people; they are not going to want to own them when it is the right time”. He of course was referring to the American public. It is this attitude or character of many of the American investors that often prevents them from achieving even average returns for their portfolios. Warren Buffett stated only recently that if you wait to see the robins, Spring will have passed. He was indicating that if you wait for proof, you may have missed the opportunity.

Over the years, I have reviewed many studies comparing the returns mutual fund investors actually received versus the returns of the funds the investors were in. The results always reported investors acting on their own (without a financial advisor attached to the account) failed to achieve the returns of the fund over the long term. Similar to the comments by Mr. Kernen, these studies determined these investors often purchased shares after significant price gains had already occurred and sold them once the share value had declined. Saying it more simply, it appears many investors start investing in funds only after the fund reports higher returns, thus chasing high returns but most likely missing a large segment of the gains. And then, those same investors sell those shares once the loss in value tested the metal of the investor, resulting in selling near the bottom and thus minimizing returns.

During times similar to now, if you are an investor and you expect returns in accordance with the risk taken, then you must be in the market with a portion of the portfolio. For the typical investor, there are four major segments to invest capital: equities, cash, bonds, and real estate. Since the markets will eventually recover and the dates that the market will move are not forecasted in advance, you need to be on the train so when the train moves you will participate. This is where management of a portfolio comes into play. Every portfolio should be allocated at least into these four major groups. If so, then there are shares in real estate, bonds, or cash available to add to equities when equities are trading as low as they are today. This does not mean everything is shifted into equities or everything at once.

As most investors should know, when interest rates fall, then bond values go up. Presently, there is not room for interest rates to fall much further. Thus, the future returns from bonds in most cases will only be their yields, since the value of the bond cannot go up much more due to moves in interest rates. With this in mind, it may be time for certain investors to move a small portion out of bonds and into equities. In another month or so, it may be appropriate to make an additional move. This permits the investor to dollar cost average back into the markets. Naturally, this is not without risk. Every investor should understand the risks they are taking or have someone with significant investment knowledge counsel them. What is best for one investor may be the wrong step for another. This is where each should obtain individual assistance.

For me, I would rather invest in today’s environment with long-term funds than to invest when the markets are near their highs. The odds are far more in my favor now that in three, four, or five years my investments will have performed well. No one knows what the future will bring, and no one can predict which days the market will be up or down. While you cannot lose money that is on the sidelines in cash, nor can you participate in the recovery as it occurs.

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