Revisiting ‘Investing in the face of fear’

It was last December when I originally wrote this article. A great deal has occurred since then and it may be wise to look at this again. I originally wrote “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.

…While listening to Squawk Box, a CNBC financial TV program, one morning this week (December 2008), 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.

... 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.”

The S&P 500 year-to-date through June 2nd is now positive with a return a little over 4%. The ride was not pretty, but it is the same as in baseball, it is still a win no matter how ugly it looked. During this time many of the most respected investors such as Warren Buffett began buying additional positions in companies when many individual investors were selling and running to the hills. Since December, many individual share prices have seen incredible lows only to recover in the last month or so. For those using mutual funds to invest, as long as you owned them during this period, you have seen considerable appreciation since the managers were taking advantage of these dips in prices. For those willing to purchase individual securities, the opportunities have been pronounced and hopefully your portfolio has benefitted.

However, if your portfolio has been on hold or on the sideline, many opportunities were missed and it may be wise to seek assistance in managing the investments. Since the November 2008 low, many equity funds are up 25% or more, and if additional purchases were made at opportune times, then the gains could be will above that figure.

The recovery is not over and opportunities still exist, but you have to be on the train to reap the benefit. Do not let the fear wreck your recovery.

For help with managing investments contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other tools all available for free.

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