The following article by Tamara Kraig, CFP was published January 6, 2013, in the Daily Local, West Chester, PA.
The Long View
How did your investments fare last year? While we recommend not watching the markets daily – or even weekly – it was almost impossible to avoid feeling that the stock market was swooping wildly up and down as it sped toward that dreaded cliff. Perhaps surprisingly, however, taking a longer view, the stock market returns in 2012 were very solid. The broad market as measured by the S&P 500 Index finished at 1,426.19 up 16.0% for the year. The NASDAQ finished at 3,016.51 and was up 18.9% for the year.
There is always a lot of hype concerning the markets. But a wise investor has to do his or her own homework. And base decisions on her personal goals and timelines. An interesting example is the initial public offering of Facebook on May 18, 2012. Amid much hype, and many reminders about past IPOs that have quickly shot up in price, and many front page pictures of CEO Mark Zuckerberg on Wall Street in his hoodie, Facebook was launched at the initial price of $38. It closed on Dec. 31, 2012, at $26.62. Down 30.4%. Now, this may not be a disaster if you still have faith that the company can make money selling ads for the steadily increasing mobile platforms on smart phones and you are willing to hold the stock longer term. If, however, a 30% loss would make it difficult for you to get a good night’s sleep, a less exciting investment opportunity might be better.
Taking the long view in investing means having an allocation that makes sense for your time horizon and goals while taking into account the overall economic picture. Without a fairly substantial portfolio, it is difficult to be sufficiently diversified to counteract a 30% drop in one stock holding. Mutual funds offer this diversity. They enable investors to participate more broadly in the stock market with less risk than simply investing in individual stocks. For instance, Large-Cap Growth mutual funds invest in large companies with potential for growth. The average return of hundreds of these funds was 15.6% according to Lipper Indexes. Likewise, Equity Income Mutual Funds which consist of a more conservative allocation of companies that consistently pay dividends returned an average 13.7% for the year 2012.
Since Federal Reserve Bank Chairman Ben Bernanke has said the Fed intends to continue to hold interest rates low into 2014 and perhaps 2015, most investors need a growth component to their portfolio. As the Facebook example shows, it is extremely difficult to pick a stock winner, but buying mutual funds that invest in many companies allows the investor to participate in the growth of companies and the strengthening economy while minimizing the risk of a steep drop due to one company’s missteps. Tamara Kraig, CFP
Tamara Kraig is a partner at the independent investment boutique Bruce A. Kraig Associates. The firm offers unbiased investment management as well as financial planning. The fee-based firm does not sell any products. This article is not a solicitation nor a recommendation of specific investments. Contact Tamara at firstname.lastname@example.org
The following article written byTammy Kraig, CFP was published by the Daily Local, West Chester, PA, October 29, 2011.
Should you stay invested in this wild market?
Many investors are skittish of the wild ride in the stock market – up sharply one day, then dropping precipitously two days later. Every day there is different explanation to justify the markets’ jittery moves. One day it appears that the EU has reached agreement for another bailout; the next day, the reports are that the bailout will be too little, too late. In this country, investors are worried that unemployment is high and economic growth is weak; the next day, investors may be happy with future company earnings and continuing low interest rates. And just for good measure, there are the days when the markets move opposite to that suggested by the news.
Some investors who can’t take the stress of the volatility are getting out of the stock market all together. While moving to cash or a money market fund will stop the volatility, it is not an investment plan for the long run. Unless you need the money within a year, being out of the stock market when a recovery occurs can be costly. If you cut your losses when the market declines, you may actually be taking on more risk than if you stayed invested.
In many previous bear markets, investors who sold their stocks rarely bought back in time to take advantage of the dramatic recovery that followed. According to Karin Risi who oversees Vanguard Advice Services, “Strong bull markets have tended to begin suddenly, even explosively, and by the time you notice that a rebound is occurring, it may be too late to take advantage of that growth.”
Previous bear markets:
Between 1960 and 2010 there have been nine bear markets (defined as a decline of 20% or more in the Standard & Poor’s 500 Index over at least a two-month period). In eight out of the nine cases, the stock market sustained a strong rally during the year after hitting bottom. Consider the last four bull markets:
Bear market Decline from peak One year later
Aug. 25, 1987 – -33.5% +22.8%
Dec. 4, 1987 (as of Dec.4, 1987) (as of Dec. 5, 1988)
Mar. 24, 2000- -36.8% -12.5%
Sept. 19, 2001 (as of Sept. 19, 2001) (as of Sept. 20, 2002)
Jan. 4, 2002 - -33.8% +22.8%
Oct. 9, 2002 (as of Oct. 9, 2002) (as of Oct. 10, 2003)
Oct. 10, 2007 - -56.7% +69.3%
Mar. 9, 2009 (as of Mar. 9, 2009) (as of Mar. 10, 2010)
During those last two bull markets, most investors who could not stand the turmoil sold during the decline and usually did not buy back into the market in time to take advantage of the sudden rally. They put themselves in the dreaded position of selling low and then buying high.
Is there a safe place to be invested?
As scary as the recent equity market has been, if you sell thinking you are being cautious, you may actually be taking on more risk than staying invested because you are likely to miss a dramatic turnaround. As studies conducted at Vanguard and elsewhere confirm, your asset allocation has more impact on your investment returns than individual decisions about which securities to buy or sell. To find the right mix of stocks, bonds, and cash for you, develop a long-term strategy based on personal factors:
Time horizon: When will you need your money?
Comfort zone: How much volatility and risk can you tolerate and still sleep at night?
Financial goals: Why are you saving money? How much will you need?
Let the answers to those questions determine your long-term strategy of investing.
While no one can say when the stock market will settle down, with a solid asset allocation in place, you will be positioned to take advantage of the rebound when it occurs. Tammy Kraig, CFP
Tammy Kraig is a Certified Financial Planner ™ with a local, fee-based, boutique investment management firm: Bruce A. Kraig Associates. The firm offers ongoing invement management as well financial planning. No products are sold. She can be reached for comments at tkraig@KraigInvestmentManagement.com.
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