Economy improves, but investors worry
Investors always seem to have something to worry about. They worry when the market is down and unemployment is high, and now they are worried the market is high and unemployment is down. Welcome to my world.
No matter how many times we hear that no one can time or predict the market, the average street investor still tries to do just that. While it is always unsettling to lose money in an investment, most people do not realize that the silent thieves of inflation, spending and poor planning are much more harmful to your net worth than staying with a solid investment plan in good and bad times.
Equity investors have enjoyed a nice bull market since the last significant sell-off in March 2009. We have had 13 pullbacks since then of 5 percent or more. During the last five years we have had two instances of a correction, which is defined as a 10 percent or more decline. In 2010 we had a 16 percent decline and in 2011 an 18 percent decline. Hopefully you did not exit your investment strategy during those times or you would have missed out on one of the most significant bull markets in history.
Looking back on your investment performance in the last five years, you can see that you actually benefited from market volatility over that time period. The market re-prices itself when necessary to keep from having artificially high prices that are not sustainable. Therefore, these are good opportunities for people consistently adding to their investments, such as through a 401(k) plan. Here you can buy during all different market cycles and accumulate more shares on the down days, which help to compound your overall return.
Typically when economic news starts to improve, investors get nervous. This may be the situation we are in currently, where we have not had a correction since September 2011. However, it is counterintuitive to worry about devaluing stocks when the economy is getting stronger. This theory further confirms that investor behavior can be a more significant driver in market sell-offs than true fundamentals. Therefore these declines typically don't last very long - an average of 23 days - after which the stock market begins to recover again.
Capital Research and Management Co. states there are three things for investors to remember:
1. No one can consistently predict when market declines will happen
2. No one can consistently predict how long a decline will last
3. No one can consistently predict the right time to get in or out of the market
Based on this good advice, we recommend investors make decisions based on their goals, time frame and risk tolerance rather than guessing the right timing. There is never a perfect time to invest, but it is proven that you will be better off financially if you do put and keep your money working for you.
Patricia Kummer has been an independent Certified Financial Planner for 28 years and is president of Kummer Financial Strategies Inc., a Registered Investment Advisor in Highlands Ranch. Kummer Financial is a four-year 5280 Top Advisor. Please visit www.kummerfinancial.com for more information or call the economic hotline at 303-683-5800. Any material discussed is meant for informational purposes only and not a substitute for individual advice.