When do most individuals invest in the markets? Generally, history tells us there is considerably more buying activity during extended bull periods. More people are willing to "invest" at times when the markets appear to be racing ahead with no chance of decline. During 1998 and 1999, at almost every public venue I visited there was always a conversation about the markets and which stocks were "hot".
When the party was over, the 2000 to 2002 time period, those adding to or just getting in during the late 1990's did not make sufficient gains to offset the losses they most likely incurred during the downturn. Many individuals ended up swearing off investments after recent losses during 2000 - 2002, and thus stayed away during 2003 missing a significant recovery in the markets.
If you purchased at or near the peak of the market in March 2000, the S&P 500's performance through June 30, 2008 provided an overall loss of (3.6%). However, if during October of 2002 you were willing to invest when many were running from the markets, your overall return through June 30, 2008 was a gain of 83.2%. While you may believe my comments may be encouraging "market timing", that is not the direction I am going. I am saying there are obvious times to be adding investments as well as taking some of the money off of the table.
While the S&P 500 is a broad index, there are many segments to the investment world. While this particular index may have had an overall loss since its peak value through this past June, there were areas that still provided gains. Our investment markets are made up of small, mid-size, and large companies as well as parts considered to be value oriented, blended, or growth. Once the S&P 500 had reached its peak value in March 2000, the 'growth' segment of the investment world regardless of company size resulted in losses through June 2008. However, had you rebalanced or reallocated your portfolio to include value type funds, this area of the investment market still managed a profit during the last eight years.
Now where is that crystal ball? While some advisors may profess to have just the right tools or strategies to know when to sell and when to buy, long-term history generally shows the tools were just that, tools and not a crystal ball. Forever chasing the markets is not the place to be. There are key indicators though when used properly can provide overall guidance that the market is too high or too low. Thus, rebalancing and adjusting the allocation can cause you to sell near market highs and purchase other areas which are near their lows. The result will be higher overall performance, since part of your portfolio will have been purchased during market lows such as today.
Just when you may believe this is not too complicated, there are other factors to consider. In addition to small versus large or value versus growth, there are industries to consider as well as areas outside the S&P 500. As an example, real estate during 2003 to 2006 or energy since 2003 are industries that outperformed the general market substantially in the referenced periods. There are many mutual funds offering targeted or industry specific investing, and thus you can usually find a fund for the area you believe to be performing better than average. For the public, taking the time to track the economy and other indicators sufficiently to make these calls is some times too much. Actually, it may look and sound like work! And for the retiree, you are generally not looking for another job.
There are mutual funds which invest broadly across the markets, and as a result should have a portion of their portfolio in the areas doing well. At least that is the desire. But few funds can stand the test of time, especially when their performance is measured by the month or quarter and not the decade. Managers leave, styles change, and then there is the economy and its ever-changing status. Managing assets is a job and requires significant time, tools, knowledge, and occasionally fortitude. If you are hoping to reduce the stress during retirement and create an overall plan to protect you from many of the risks and provide the needed income to keep pace with inflation, then you should hire a financial planner with the training in the many financial areas impacting individuals such as a certified financial planner. Contact Quality Financial Concepts or the Financial Planning Association website to locate other area CFPs.
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.