Slow and Steady Wins the Race

Investing

Why patient investors win when markets drop

When the stock market takes a wild ride, panic is the costliest move you can make. The experts agree: for the average long-term investor, the smartest response to a market plunge is usually to do nothing at all.

1 When the Market Plunges

So how’s your blood pressure been in the last week with the wild stock market ride? Ready to call your cardiologist? If she owns stocks, she’s probably not in much better shape.

The Dow Jones Industrial Average closed up at the end of trading Friday, but that followed a week that saw record drops. According to the S&P Dow Jones Indices, since its most recent peak on January 26, it had seen more than $2.29 trillion (with a “T”) lost in less than five days. The 10.8 percent plunge last week officially put the market into “correction” territory, meaning a drop of at least 10 percent of the Dow’s value.

Why is this happening? Some analysts say the market reacted unfavorably to the good news last week that incomes are rising, fearing this would trigger the Federal Reserve to increase interest rates to slow down an overheating economy. Others blame the recent tax cuts passed by Congress, claiming that they were throwing gasoline on an already overheated economy. Still others say the computerized trading that makes trades in seconds had a hand in the “flash crash.”

And some say there’s no discernable reason. One analyst at The Washington Post wrote, “It’s not just that there’s no coherent story there. It’s that there’s none at all.” He noted the variety of explanations from various pundits. “But these are just sophisticated ways of saying you don’t know. Which is part of this. People seem to be panicking because they don’t know why they’re panicking.”

And although stocks opened up this morning, the market still likely hasn’t reached bottom.

“I don’t think the decline is over. Valuations are still stretched.” — Kristina Hooper, chief global market strategist at Invesco

2 What Should You Do? Mostly Nothing

So what should you do? You have stocks, maybe as part of your 401(k) or other retirement plan, maybe as an individual investor. Should you get out now, rebalance your portfolio, jump out a window?

According to Mellody Hobson, a financial analyst for CBS News, “The average American during this period should do nothing.” She explained that although last week’s drop was touted as the biggest one-day point drop in history, that’s only because of the high number where the market started. She pointed out that, percentage-wise, “last week’s drop wasn’t even in the top 20 [list of one-day market declines].” The largest was the one-day point plunge of Oct 19, 1987, known as Black Monday, which was an actual “crash.” Markets fell 22.61 percent that day.

Hobson’s advice echoed Warren Buffett’s famous quote: “Our favorite holding period is forever.”

So did a number of investment experts interviewed by The Post.

Greg McBride, chief financial analyst for Bankrate.com, said, “Let’s look at the big picture: The economy is improving. If the market is falling, that means it’s now on sale.” In other words, now’s the time to keep buying, not sell off.

Jeanne Thompson, senior vice-president of Fidelity Investments told The Post, “When the market is down and you are continuing to contribute on a regular basis [as with a 401k plan], you’re buying in at a lower price, and you are taking advantage of dollar-cost averaging. When the market goes up, you know you’re realizing the growth from the market as well as from your contributions.”

(Dollar-cost averaging means purchasing stocks or other investments on a regular schedule regardless of share price. Since more shares can be bought with the same amount of money when prices are low, you’re in effect getting a bargain and you’ll come out ahead in the long run.)

3 The Long-Term Case for Staying In

Historically, despite occasional plunges, stocks tend to go up over time. Consider this example from the investing and financial news site InvestorPlace:

If you had been alive in 1815 and had $10,000 to invest, these are the returns you would be seeing today (assuming you reinvested all your gains and were still alive today):

• $5.6 billion if invested in the stock market
• $8 million if invested in bonds
• $26,000 if invested in gold.

In fact, just since March 2009, stocks have risen 282%. It’s been the second-longest bull run in market history. Of course, what goes up must occasionally come down, but it eventually recovers.

4 Match Your Risk to Your Age

That’s why you need to consider your age and proximity to retirement when deciding how to manage your assets.

“People should always be in the appropriate asset allocation, taking on the risk they can afford to take,” Carolyn McClanahan, a certified financial planner, told The Post. If you’re in your 20s, 30s, or early 40s, you can afford to be aggressive.

“As long as you don’t look at your portfolios all the time and this is truly savings for when you are older, you can afford to be risky,” she said. “Don’t look at the market except to occasionally rebalance.”

Other investors echoed this advice, recommending that as people approach retirement age, they should move more of their investments out of stocks and into less-risky investments such as bonds. Otherwise, ignore the market.

Hobson told CBS News, “I wouldn’t be worried for a long time, because the underlying fundamentals are so strong, not only in the US, but in major markets around the globe.”

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