‘Staying the course’ can pay off for investors
Published 2:32 pm Friday, August 28, 2009
While stock prices were going through their dizzying descent, some people gave up on investing and decided that, from now on, they would put all their money in savings accounts, piggy banks, under their pillows—anywhere but in the market.
Another group took a “wait-and-see” approach and told themselves they’d start investing again when they were sure that things had turned around.
But a third group quietly decided to “stay the course” and continued investing.
In fact, from March until early August, the stock market, as measured by the S&P 500, rose about 45 percent. But the fortunate investors who kept their money in the market weren’t just playing a hunch–they also had history on their side.
Because the stock market has followed recessions by rising in nine out of 10 cases, both six months and 12 months after the recession ends, according to Ned Davis Research. (Keep in mind, though, that what’s happened in the past can’t necessarily predict future results.)
Furthermore, the U.S. economy is now expected to grow at an average 1.5 percent pace from July through December, according to a recent Bloomberg News survey of economists.
Of course, no one is suggesting that boom times are right around the corner, either.
A 1.5 percent growth rate, while obviously better than the negative rates found in a recession, is still not particularly robust, and a market correction can happen at any time for any reason.
However, even a slow move into positive territory is a good sign for investors. If you were one of those who had confidence in the long-term prospects of the American economy and our financial markets, your faith likely has been rewarded in recent months.
And a stay-the-course approach remains a better way to invest than, say, attempting to “time” the market or chasing after “hot” stocks.
Yet, investing always involves taking some risks. But you can help control the risk level by following these suggestions:
Think long-term. When you invest for the long term, you’re less likely to be bothered by short-term price movements—and you’ll find it easier to stay the course.
Diversify. By spreading your dollars among an array of investments—stocks, bonds, mutual funds, Treasury bills, certificates of deposit and so on—you can help reduce the effects of a downturn that may hit one asset class particularly hard. Diversification, by itself, cannot guarantee a profit or protect against a loss, but it’s generally considered to be an effective weapon against market volatility.
Focus on quality investments. If you take a close look at those of your investments that have made the biggest gains in the recent rally, you’ll probably find that these investments were characterized by their quality. That’s because quality investments—such as stocks of companies with competitive products, solid management and strong business plans—are typically the first ones to emerge strongly after bear markets. And over the long term, these same investments are likely to bring you the best prospects for success.
As an investor, you’ll probably always encounter some bumps in the road—but if you’re ultimately going to reach your financial objectives, you at least have to be on that road. So stay invested—in all types of markets.