DALLAS (BP)–During the last few months we have seen significant volatility in the financial markets. Staying the course in a roller coaster market can be a major challenge.
Wise investors do well to remember 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? Goals are established for times like these. They help so that you can stick with a plan and not be swayed by emotion during 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 GuideStone’s Investor Profile Quiz. The profile may be viewed on GuideStone’s website at www.GuideStone.org. Participants also can request a copy by calling GuideStone’s at 1-888-98-GUIDE (1-888-984-8433).
Consider that historically the stock market has been friendly, yielding many more positive returns than negative ones. Industry research firm Ned Davis Research. Inc., looked at stock performance over an 80-year period, 1926 through 2006. What it found was 88 percent of the five-year periods and 97 percent of the 10-year periods yielded positive returns. And, 100 percent of the 20-year periods yielded a positive return.
Essentially, you could choose any five-year period of time between 1926 and 2006, and almost nine out of 10 of them 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.
— 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 percent. That period includes “Black Monday,” Oct. 19, 1987, the tech bubble burst of 2001 and the Sept. 11, 2001, terrorist attacks.
Another investor 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. His average annualized return drops to 10.2 percent. Miss the 30 best days, and his average annualized return is 6.6 percent. If one misses the 50 best days of market performance, the annual average return drops to 3.7 percent — barely above the rate of bank certificates of deposit. (Information gathered from Westwood Holdings Group, Inc.)
— 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.
— 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.
— Still confused and want 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 you with little time to think about how you are going to invest for your 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 which are diversified “fund-of-funds” that have an asset allocation that gradually becomes more conservative as you approach retirement. You simply choose the fund closest to your retirement date, make appropriate contributions, and the asset allocation is adjusted to become more conservative as you approach that retirement date. 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.
Hopefully, you will use these principles as you consider what to do with your retirement account. If you would like to talk about your account with a GuideStone representative, please call 1-888-98-GUIDE (1-888-984-8433).
Roy Hayhurst is the senior marketing communications editor for GuideStone Financial Resources of the Southern Baptist Convention.