DALLAS (BP)–Long-term retirement investors should stay focused on their goals, not on short-term market fluctuations, including even the Sept. 15 sell-off that resulted in the single worst trading day since the Sept. 11, 2001, terrorist attacks.
Bad news in the financial services sector of the market — the bankruptcy filing of investment bank Lehman Brothers, Bank of America’s purchase of Merrill Lynch and reported cash problems for insurance giant AIG — led jittery investors to flee stocks and caused the market’s drop. While the 500+ point drop in the Dow Jones Industrials was significant, there was a modest rebound the following day. Also, the Federal Reserve announced Sept. 16 that it would lend up to $85 billion to AIG in order to protect the financial system.
Additional negative news was announced on Tuesday, September 16, as shares of a large money market mutual fund “broke the buck” — fell below the standard $1 a share net asset value due to holdings in Lehman Brothers securities.
Money market funds have long been considered relatively safe because of their investments in high-quality, short-term securities. GuideStone Funds’ Money Market Fund strives to provide safety and security for its participants’ cash investments. The Money Market Fund continues to maintain a constant $1 per share net asset value and seeks to maintain that value in the future. The fund has no exposure to any Lehman Brothers obligation.
“Certainly, many investors are alarmed by what happened with the markets Monday,” said Rodric E. Cummins, chief investment officer of GuideStone Financial Resources. “The important thing for investors is to remain calm, consider your financial goals and not to let your emotions guide investment decisions.”
GuideStone continues to stress important principles for navigating today’s troubled markets:
— Always focus on your objectives, not your emotions.
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.
Consider that over long time periods the stock market has been friendly, yielding many more positive returns than negative ones. One industry research firm, Ned Davis Research Inc., looked at stock performance over an 80-year period, 1926 and 2006, and found:
1) 88% of the five-year periods and 97% of the 10-year periods yielded positive returns.
2) 100% of the 20-year periods yielded a positive return.
Essentially, the company found, an investor could choose any five-year period of time between 1926 and 2006, and almost nine out of 10 would show growth in an investor’s portfolio. While past performance is no guarantee of future performance, the market itself has been resilient through the years.
Participants can periodically review their risk tolerance by utilizing GuideStone’s Investor Profile Quiz, found on GuideStone’s Web site (www.GuideStone.org) and in the Fund Choices booklet available through GuideStone’s customer relations specialists at (888)984-8433.
— 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 and 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.
Getting out of the market during roller-coaster rides is seldom a smart move. What happens if you’re out of the market and the market goes up? Consider an investor who invested in an S&P 500® Index fund from January 1985 until March 2007. An investor who parked his money there for all 5,607 trading days would have an average annualized return of 12.8%. That period includes “Black Monday,” Oct. 19, 1987, the tech bubble burst of 2001 and the Sept. 11, 2001, terrorist attacks.
On the other hand, consider another investor who got jittery every time the market pendulum swung from profit to loss. He missed the 10 best days over the course of those 12 years and the average annualized return drops to 10.2%; miss the 30 best days, and the average annualized return is 6.6%. If one misses the 50 best days of market performance, the annual average return drops to 3.7% — barely above the rate of bank certificates of deposits.
— 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 gains realized in the equity (stock) markets over longer periods of time.
“It may seem difficult as investors watch their account balances decline, but the reality is that a focused investment discipline, diversification, and persistence will likely be the key to weathering this and other storms,” Cummins said. “While lower market prices do cause uncertainty, this also can be an excellent time for opportunistic investors to move into the market while values are off their highs.”
Market volatility and indiscriminate selling of assets by others often creates investment opportunities that can be captured by insightful investors whose long-term financial objectives are properly tuned to long-term investment strategies. Consistent contribution to a retirement plan affords investors a systematic way of taking advantage of investment opportunities as markets ebb and flow.
— 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.
“Markets negatively react to uncertainty,” Cummins said. “As situations begin to return to normal, we expect to see the markets stabilize and, if history is any guide, begin to return to profitability.”
Investors may still be confused. GuideStone offers a simplified approach to investing over the long-haul.
Many times the demands of ministering to a congregation or preparing three sermons a week leaves a church staff member with little time to think about how to invest for retirement. That’s why GuideStone Funds launched a new series of mutual funds, the MyDestination Funds. These funds are date target or life cycle funds that are diversified “funds-of-funds” in which the asset allocation gradually becomes more conservative as retirement approaches. An investor simply chooses the fund closest to his retirement date, makes appropriate contributions and the asset allocation is adjusted to become more conservative as the retirement date nears.
The MyDestination Funds may be a smart choice for an investor who desires a simple investing approach, wants professional management with automatic reallocation and is willing to pay an additional expense in order to receive a more comprehensive level of asset management services.
MyDestination Funds attempt to achieve their objectives by investing in the GuideStone Select Funds. By investing in these funds-of-funds, an investor will incur the expenses of the MyDestination Funds in addition to those of the underlying funds. A person may invest in the Select Funds directly, except the Global Bond Fund. MyDestination Funds also are subject to the risks of the underlying funds they hold.
Investors should carefully consider the objectives, risks, charges and expenses of the funds before investing.
For a copy of the prospectus with this and other information about the funds, call (888)984-8433 or visit www.GuideStoneFunds.org. Read the prospectus carefully before investing. Shares of GuideStone Funds are distributed by PFPC Distributors, Inc., a registered broker-dealer and underwriter of the funds, 760 Moore Road, King of Prussia, PA 19406.
Roy Hayhurst is the senior marketing communications editor for GuideStone Financial Resources of the Southern Baptist Convention.