Tuesday, July 31, 2007

Recent Fluctuation - It's Normal

In February of this year the stock market, as measured by the Dow Jones Industrial Average went down over 400 points in one day. It was scary for people. A similar event happened last week when the Dow was down over 500 points for the week, after hitting an all time high and surpassing 14,000 for the first time.

You need to know that despite the panicked press, this is completely normal and in fact healthy. You should also know that it will happen again, we just don't know when - this is the nature of stock markets, if it wasn't they wouldn't be worth our time investing in. It is this fluctuation that creates risk that allows us patient investors the opportunity to earn superior returns over bonds.

I tell all my clients that the one thing I can guarantee is that at some point in time in the future we will lose money and it will hurt.

However, if we can overcome the short term fear and stay invested in a diversified portfolio that includes stocks, bonds, and real estate - we have the opportunity to earn a much better return than their panicky neighbors and hopefully beat the indexes we use as benchmarks.

The recent fluctuation is normal and to be expected, even welcomed.

You should know a few things about investing in the stock market, as follows:

On July 8, 1932 the Dow hit a low of 40. Last week the Dow hit 14,000, before pulling back. Nick Murray commented "The intervening period was the worst in human history: Depression, WWII, Cold War(and 9/11, Iraq War, added). There are always reasons Not to buy stocks, but time has shown us that even during the worst of times, stocks survive. You need to understand that ups are permanent, the downs are temporary.

I don't know if we are in a bear market or a bull market and to be honest it doesn't matter. In fact, I don't even believe in bear markets, they don't exist (famous last words, right). On average we suffer a major stock market set back every five years, sometimes as much as 30%. Between 2000 - 2002, the market from its top to bottom was down nearly 50%, but we survived and now the market is higher than it was nearly seven years ago.

My main point is that if you are in stocks and diversified, you will still have times of pain and loss, but if you do not panic, and if you stay diversified, you should be able to ride out these short term drops.

In other words, don't worry about what the market does day to day, keep a look at the big long term picture.

Also remember, if you are young, the market falling presents an amazing opportunity to buy more at lower prices, always a smart thing.

For those of you who are ready to turn to a market timing service, don't fall for them, timing is not possible - it is in fact hubris. Warren Buffet once remarked that he couldn't time the market, didn't know anyone who could time the market, and didn't know anyone who knew anyone who could time the market......if the greatest investor of all time can't do it - what makes you think the guy down the street can?

The future is impossible to predict, don't ever forget that.

Finally, relax, this is normal.

Scott Dauenhauer CFP, MSFP, AIF