Financial Frontlines®

Part 3 — Know Thy Enemy The market took a beating in 2002. Then, as usual, the market zoomed back in 2003, 2004, 2005 and 2006 and most folks were either left at the starting gate or late for the party.
You can’t let those nasty emotions play with your rational thought processes again. Build a plan based on facts. Trying to time-the-market is a plan that spells D-O-O-M. Do you realize that if you were an investor in the S&P 500 index from 1987 to 2006 and you missed just the 17 best months of the S&P 500’s returns during that period, your average annual return was 4.53%. 17 months out of 228—7.5% of the time! Still think you can time the market? You won’t notice the upswing until it’s too late.

By holding the S&P 500 index during that period without missing the 17 best months, your average annual return was 12.46%. Missing the 17 best months meant your average annual return was less than the return for Treasury Bills at 4.76% for the period. How do those differences in returns affect your bottom line? We’re talking big time money in your pocket.

Take $100 over 20 years. At 6% average annual return, you will have $321. At 9%, $560. The 9% in this example is 74.5% better than the 6% return. That’s not chump change. Just the facts. First understand I’m talking about stock mutual funds here. This is the investment vehicle the majority of us will use for our portfolios.

So the facts…

• In the short term the market is a roller coaster; up and down.
• In the long term, the market is always up—it is up 70% of the time. Admit it, if Vegas paid you at 70% odds, you’d live there and gambling would be your profession. Isn’t the “long term” where your future resides? Even for you retirees; how long will you be retired—how many decades?

The roller coaster—expect it, plan for it, and take advantage of it.

If the market is always up over the long haul, then buying when the market is in one of its few down periods is a rare opportunity that must be grabbed when it occurs. These temporary market dips are essential for a better long term returns because they give you the chance to buy cheaply and rake in more shares. When the market is down, funds are “on sale”, a bargain.

You wouldn’t buy a shirt worth $20 for $50 would you? Then why do you buy your $20 investments at $50? (Remember the “C” fund example previously) During the investing or accumulation period of your life, focus on how much you own (shares) not the value of your account. It’s about the shares and how many you own at retirement.

Imagine a fund that paid $1 a share in dividends. Wouldn’t you rather own 10,000 shares than 1000 shares? Same holds true when the fund share price goes up a $1. Concentrate on collecting assets…shares. Buy assets (investments that grow) not liabilities (purchases that decrease in value).

Pop quiz. Which are the assets and which are the liabilities? Car. Long-term stocks. TV. Real Estate. OK, so what’s the plan? Put your investment plan on auto-pilot (as a retired Air Force guy, I had to work in at least one flying reference).

Go To Part 4 – The Plan

Trackback URI | Comments RSS