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Americans today are weathering the brutal gale winds of a perfect storm–the collapse of the housing and financial sectors, eroding consumer confidence, and the worst unemployment rate in 14 years. They’re doing everything possible to buoy their finances as they keep their households from capsizing.
Over the past six months investors have grown increasingly anxious with the volatility of financial markets, which ebb and flow with each economic report, interest rate hike, or congressional hearing about industrial bailouts. One just has to look at the activities in late November as an example of the market’s extreme volatility. During two days of trading–Nov. 19 and Nov. 20–the Dow industrial average plummeted due to concerns about the health of our financial system and reports regarding the steepest decline in consumer prices since before World War II. As a result, the Dow closed at 7552.29–an unprecedented decline of more than 10% over a two-day period and its lowest level in more than a decade. At the same time, the S&P 500 had marked an annual decline of 48.8% on course to be the worst yearly percentage slide in 80 years. Then, on Nov. 21, news that President-elect Barack Obama was likely to select Timothy Geithner, the Federal Reserve Bank of New York president and CEO who has been involved with the $700 billion financial bailout, as his Treasury secretary helped catapult the Dow nearly 500 points in the final hour of trading, gaining 6.5% to close above 8,000. Such wild fluctuations have forced nervous investors to stash their cash in Treasury bills that may be ultra-safe investments but offer puny returns.
I can’t understate the severity of our economic climate or unpredictability of today’s financial markets. But I can share a bit of advice with you: Don’t panic. Pulling your money out of the market or sticking your dollars under a mattress is akin to torching your nest egg. I’m here to tell you there are still great opportunities to build your portfolio and grow retirement assets. Times like these require what I like to call “intelligent investing.”
Caving in to fear will not produce long-term wealth. If anything, it’s a detour leading to a financial dead-end. The stock market has always been subject to ups and downs triggered by economic and political events. But selling your holdings at the bottom locks in losses and diminishes your chance to rebound, much less realize significant gains. Any long-term investor can tell you that bear markets inevitably give way to bullish times. As reported in this month’s Moneywise section, in the 12 months following the last 10 market bottoms (1949 to 2002), stock returns have averaged 32%. A study by Dalbar, a financial research services firm, found that while U.S. equity funds had a long-term annualized return of 11.9% for the 20-year period ended Dec. 31, 2004, individual mutual fund shareholders eked out only a 3.7% gain due to entering and exiting stock funds at the wrong time.
So ultimately, those who benefit are intelligent investors who don’t