The news cycle, which usually is designed to stoke investors’ fears and panic, is actually turning more positive now. The storylines are changing to observations of “a slow but continuing economic recovery”.
We need the psychology to change to the positive to make up for the ongoing bad news out of Europe, and as PIMCO’s El-Erian says, to offset the “headwinds of Congressional dysfunction”.
Hopefully, this news cycle can help repair investor confidence.
One of the most common investment strategies is called “Buy and Hold”, which usually consists of mutual funds or other securities held for the long term and rebalanced occasionally. These funds are held during the best and worst performing years. The theory is that you can never predict the future performance of the market or time your trades to sell at the top or buy at the bottom. Instead you ride the waves, knowing that there will be ups and downs.
After the recession of 2008 and 2009, the “Buy and Hold” strategy started to lose favor. Investors could not tolerate such significant declines in their portfolio. It caused many investors to give up on their strategy, sell out of their portfolios at the wrong time (the bottom) and move to cash to wait for better days, more optimism and more clarity.
And so they sat. and sat. and sat.
Here we are, four years later and the S&P 500 has now returned a total of 130% (3/9-12/12). There is a pattern here. American Funds released a newsletter that has a chart on page 2. It highlights the returns for the subsequent 10 years following the major declines of 1939 and 1974. The returns for those two ten year periods were in the 15% range, well above the 11% average for the S&P 500.
It turns out, this sort of return is not unique when compared to historical performance.
For those investors that stayed invested, they are watching their portfolios return to previous levels and grow even more. But, unfortunately many investors are still sitting on the sidelines wondering how to get it.
Maybe “Buy and Hold” is not dead after all! Although, it may not be right for everyone.
1 – Limit the amount of news you watch. So much of it is noise and simply a distraction. Take it with a grain of salt.
2 – Periodically review your statements and make calculated decisions. It’s easy to react quickly if you see a bad news report and then review your statement.
3 – Keep the course. Despite all the voices in your head that tell you to sell, hold on to your strategy. It may be hard, but that’s why you have a strategy in the first place.
4 – Stay diversified. Invest in different asset classes to spread your risk out. If you are holding too much in one specific stock or mutual fund, consider moving some of it elsewhere.
5 – Consider dollar cost averaging. If you’re trying to time when to get back in the market or when to make contributions, dollar cost averaging may help. With most fund companies and broker/dealers, you can establish rules to invest a specific amount each week/month. That may reduce the risk of buying a security only to see it drop shortly after you purchase it. It allows you to ease back into the markets, instead of jumping in. Keep in mind, this method does not ensure a profit and does not protect against loss in a declining market, so investors should consider their willingness to continue purchases during a declining or fluctuating market.
6 – Get help. It is becoming more and more complicated to invest with more options and increasingly complex products that may not be right for you unless you talk to a professional.
But if you read this, and you feel that even with those changes, you can’t stomach another decline like before then you may need a new strategy all together. We had several client that express their concern and have developed a model portfolio to meet their needs. It looks to capture profits when trends within a variety of asset classes are positive and sit in cash when the trends are negative. You can read more about it here.
A recent article by the Guardian discusses 10 reasons why news can harm you. It’s an interesting read, one that reinforces a message that we regularly communicate to our clients: news is sensationalized to draw viewers but it should be taken with a grain of salt and not relied on to make investment decisions without doing your own research.
The article references the sensational and shocking stories we see. These stories are designed to scare us into doing something (or not doing something). The article fails to recognize, that there is a lot of insightful, objective, and thoroughly-researched journalism produced every single day that readers should be reading. Length does not necessarily indicate quality. Long articles can be sensationalized just as much as a tweet. And a tweet can be more insightful than a long article.
The problem becomes: How to determine quality news from an eye catching headline with regurgitated content. Second, where do we find quality news and who can we trust?
We will cover those questions in a later post.
This is the third part of a series (Part 1, Part 2, Part 3, Part 4)
For many investors, the bad news was cause for them to pull their money out, sit on the sidelines and wait for conditions to improve. They waited for the situation to turn around and to feel confident again in the markets.
We all remember the infamous day of September 29, 2008 when the markets dropped so much. But the very next day, the markets had one of the best days ever.
And for the past three years, the economy has been growing and growing. Many investors who stayed invested are back to where they were before the 2008 recession.
Unfortunately, many are still sitting on the sidelines watching the news and seeing one headline
This is the second part of a series (Part 1, Part 2, Part 3, Part 4)
Numerous studies suggest people are more interested in bad news than good news. It’s easier to scare someone into reading or watching a news story than any other way. But some psychologists think they can explain why we have a desire to learn more about the bad, rather than the good.
Scientists suggest this search for bad news can be traced back to our hunter-gather roots since anything that was perceived as threatening had to be dealt with immediately for survival.
But in today’s environment, when we hear about bad news we hop on Twitter, the internet, or the TV. Take September 29, 2008 when the markets faced one of the worst days in decades. CNBC had the highest ratings ever on that same day. Or take a few months earlier – January 22, 2008, the day the Fed cut interest rates by the highest amount in its history. On that day, the search term “Recession” was searched at a rate of more than five times the day before!
There is something, possibly instinctual, that pulls us to learn more about the negative news.
This is the first part of a series (Part 1, Part 2, Part 3, Part 4)
We’ve seen these headlines in the news over the course of the last few months:
“The U.S. Is Going Broke”
“Social Security’s Coming Crisis”
“There’s No Way Out of this Unemployment Crunch”
“Exploding Federal Debt – Why so Dangerous”
From an economist’s standpoint, these problems aren’t new. We’ve seen these exact problems before in our lifetime. In fact, these headlines aren’t new either – they were all written between 1972 and 1984!
Sure the details may be different, but the overall issues have always been there, percolating on the back burner. Once the media picks up on the problem, they package it up in a way to grab your attention so you buy the publication, see the banner ad, or watch the advertisement.