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ANALYSIS: Hang tough in a down market

DALLAS (BP)–During the past two and one-half years, most retirement plan participants in the Annuity Board of the Southern Baptist Convention have watched their account balances grow significantly smaller. Hanging tough in a down market can be a major challenge. The current bear market will end and we will see a recovery. However, the recovery may be slower than what we might want it to be.

While the Annuity Board is not in a position to give investment advice, we can remind investors of some very important principles of investing that should be considered in all market environments, including the uncertain conditions that we now face:

— Always focus on your objectives, not your emotions.

Remember the goals that you have established and the time frame that you have to invest. Has anything really changed? Are your retirement goals and time horizon still the same? Objectives are established for times like these so that you can stick with a plan and not be concerned with the emotion that naturally exists in difficult market environments.

Specifically regarding retirement participants, these assets are to serve needs for a long period of time. Make sure your objectives and actions are consistent with your time horizon. Participants can periodically review their risk tolerance by utilizing the Annuity Board’s LifePartner Investor Profile. The profile may be viewed on the Annuity Board’s website at www.absbc.org or participants may request a copy by calling the Annuity Board’s toll-free number, 1-800-262-0511.

— Avoid making impulsive decisions.

Guard against making ad hoc changes in your portfolio. Making changes based on short-term market movements is almost a guarantee for failure as it promotes “buying high, selling low.”

The performance of your account moving forward will be determined based on results of the financial markets in the future, not the past. Selling today cannot avoid yesterday’s losses in a down market. Likewise, in an up market, you cannot buy yesterday’s performance by investing in the hottest fund.

If you absolutely have to make changes in your portfolio, consider making them in small increments. This allows you to dollar cost average and gives you time to more seriously consider your actions.

— Don’t count your losses.

Tallying up how much has been lost in your account serves no purpose. If you want to measure the progress/status of your investment account, focus on the large gains realized in the equity markets over longer periods of time. The S & P 500 Index, despite a loss of about 39 percent since its peak in March 2000, has earned an annualized return of 10 percent since 1994, a figure that is in line with historical averages.

— Maintain realistic expectations about market behavior.

Financial markets move up and down over time in response to social, political and economic events. Further, equity investments are by nature more volatile than other asset classes such as cash and bonds. Equity investors should be able to accept significant short-term fluctuations in the value of their portfolios.

We have been through an unprecedented period of prosperity in U.S. financial markets. In the years immediately preceding 2000, volatility was almost entirely on the upside, with the S & P 500 Index posting nine consecutive years of positive returns with only six negative quarters. From a historical perspective, that particular time period reflects a performance pattern that is neither normal nor sustainable long-term in the equity markets.

— Understand the benefits of diversification.

While it may seem that asset classes run in concert with one another, a well-balanced and diversified portfolio that includes U.S. equities, non-U.S. equities and bonds helps lower risk by spreading your investments across different market segments and asset classes.
Roddy Cummins serves as executive officer for investments at the Annuity Board of the Southern Baptist Convention. He is a Chartered Financial Analyst and has more than 18 years of experience in the investment industry.

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  • Roddy Cummins