As we've seen and experienced in the past six months the world of stock market investing can be a terrifying place for the private investor. The speed and ferocity at which the market dropped this past fall and winter was more than most investors could stomach. You may be asking yourself, "Should I keep my money in the stock market over the long term?" The answer is, "It honestly depends." While experts have touted the stock market for years as an inflation beating component of investing, the reality over the past ten years (considered "long term" in the investing world) has proven much different. Private investors must ask themselves if they should keep their assets in a market that returned virtually nothing over a 10-year period. At this point many investors are paralyzed and are waiting for some bounce in the market off its recent lows to try and regain at least some of the unrealized losses they've had to come to terms with over the past six months. But the reality is that it's highly unlikely for the Dow Jones Industrial Average to return to the 14,000 level anytime soon. So ask yourself this question with unabashed honesty. If it did rally quickly to enormous heights again, would you truly be willing to sell your holdings when the market was a raging bull, maybe pay a bunch of capital gains taxes in your taxable accounts, give up your dividend income and capital gains distributions, and then sit on the sidelines while the stock market possibly roars even higher because you can't call the top with absolute certainty? It's doubtful because investor emotion and logic during periods of "euphoria" or "despair" often goes out the window. So here's the point.
Over the past nine years we've seen two violent declines in the stock market - the technology bust in the early 2000s, followed by the terrorist attacks on 9/11/2001, and, of course, the most recent collapse of our financial system in 2008. In the early 2000s the stock market declined nearly 40 percent from the top to the bottom before it turned around. The stock market downturn we're currently experiencing has been down more than 50 percent from the top reached in October 2007 to the most recent bottom in March 2009. Whether the stock market tests another bottom again is unknown. Truth be told, a couple of years before the market reached its top in 2007 many investors had just recovered their losses in the investments they held through the technology bubble and bust. Many were finally feeling like the long term wait was worth it - the stock market was delivering on its attractive long term return promise. And then - boom! The rug was ripped out from under them again.
It begs to ask the question if we are in a sustained period of more frequent boom and bust cycles of the stock market. No one can predict, but with two very painful corrections in less than ten years the reality is that private investors, particularly those in middle age and retirees, may not be able to afford another stock market collapse in the future without it causing permanent economic calamity that may impact the rest of their lives. Those who choose to continue to invest a substantial portion of their assets in the stock market and expect to eventually live off of the money that's invested should be prepared to regularly get out of the stock market when it's in a sustained upswing and place their assets elsewhere for periods of time to reduce the risk of potentially catastrophic losses when it does decline. While diversification into other assets can help temper violent stock market declines, it cannot totally mitigate the damage as we've seen with this most recent decline. One can almost guarantee that the predictable fear and anxiety that result when the stock market experiences a substantial decline during future cycles will set in and many will do nothing but watch their statement balances dwindle once again. So a different approach must be considered for private investors who choose to invest in the stock market. What's an investor to do?
Ignore the noise of the popular media and all of the current market "gurus" who talk about how the market has gone up and down "X" number of times in the past "Y" number of years. When you're dealing with real and significant investment losses and deciding where you go from here, it doesn't matter much what's happened in past market cycles. It's time to ask yourself what you're honestly willing to tolerate and live with in terms of stock market risk and volatility going forward. No investor can have it all - limited risk, limited downside, unlimited upside, and perfect knowledge of when markets have reached cyclical highs and lows. Remember that even those who were highly disciplined about investing through up and down cycles and who regularly reinvested dividends and capital gains may still be facing big unrealized losses or possibly no gains for the past decade. It's time to seize the moment and think long and hard about your investments. Try to strip away and work through the fear and trepidation. If 30, 40 or 50 percent declines in your stock portfolio are intolerable for you, it's time to rethink your entire investment process and carefully reallocate to less risky and yes, less "exciting" investments. Note that I didn't say "riskless" investments, which don't exist. My guess is that the investing public has likely had about as much excitement as they can tolerate for the present time.
Nancy McColgan is a Certified Financial Planner® and a 25-year veteran executive of the financial services industry. She is CEO of Charles Street Advisors, a fee only Maryland-based Registered Investment Advisor and Financial Planning firm. She can be reached at http:http://www.charlesstreetadvisors.com Article Source: http://EzineArticles.com/?expert=Nancy_McColgan |  |
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