The sky is falling - the sky is falling! During investment market corrections and bear markets, I understand those with investments in the market may feel like Chicken Little when something fell on her head and she thought the worst. However you may react, whether it is churning in your stomach or feeling weak, you must remember why you are investing and your time horizon.
If your investment term is short, then your money should not be at risk unless you are an investment professional making daily trades. The daily swings in the markets cannot be predicted with sufficient certainty to safe guard short-term investors. Money markets, certificates of deposits and short-term bonds are best for investors who need to use their money within the next few months and up to a year or two. And when I refer to “use their money,” I am not speaking about the income from your investments, but actually consume that amount of cash.
However, if your investments are for long-term goals occurring five or more years in the future such as retirement, or to meet long-term needs like creating income for the next three to twenty years or longer, then short-term declines, while difficult, should be considered opportunities and not reasons to sell and go hide. Now, I am not saying portfolios should not be adjusted during weak times to slow the declines. There are obvious trades that may need to occur. Investments in growth oriented funds may need to be reduced or abandoned, for value based equities as well as other types of trades.
During every prior market correction, there have always been opportunities to purchase blue-chip names for prices the average investor dreams of paying. As examples, IBM traded below $60 during 2002, and traded this past week above $103 and Boeing, another blue-chip name traded below $27 in early 2003, but traded recently above $78. During 2002 and early 2003, I am certain many investors were not looking at IBM or Boeing as great buys. During this time period if you were investing for the short-term, then IBM or Boeing would not have even showed up on the radar screen. But, for the long-term investor, history now shows both of these particular investments were good opportunities several years ago. You might ask, does the price have to return to these levels before they are once again good opportunities? Only the future can answer this with certainty, but generally, an investment does not have to trade at record lows before it may be considered an opportunity.
During times of significant market corrections and even bear markets, generally the non-professional bails due to fear. So many studies exist that indicate many individual investors sell at market lows only to buy back in once they have seen the markets recover, supposedly indicating the “worry” is over. This type of selling and buying is almost certain to result in below average returns. The long-term buy and hold approach, while difficult during major corrections and bear markets, often result in higher overall investment returns.
While buying and holding may sound like burying your head in the sand and not looking at your investments for years, that is not the case. When the markets are over bought, meaning they are at highs, there may be items worth selling off or reducing the position. During the other end of the spectrum, when the markets are at lows, there will be buying opportunities that time may prove.
Per Morningstar, since 1973 through 2006, there have been seven market periods of contraction. Each period varied in length, with the 2000-2002 as the longest. What has been consistent during this time, after each period of contraction, was followed by a period of expansion that was higher and longer. They also indicate that since 1926, there have been fourteen periods of decline. Only four declines required more than 20 months to recover the losses and show gains. These were the Great Depression, and recessions occurring in 1946, 1973, and 2000. The remaining periods recovered in as little at 18 months and several as few as three months.
How long will this correction or bear market last? No one can predict this with certainty. To better weather the volatility requires a diverse portfolio and not panicking. You should be looking for the opportunities and continue to keep your eye on the true time horizon, your long-term goal. If this is not for you, then you should hire a professional to manage your investments and turn this task over to them.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.