Monday, November 26, 2007
2007: The Year of Fluctuation
It has been a year of wild fluctuation in the stock market. Today the market closed at 12,743.44 or 10% off its high of 14,164 set on October 9th - an astonishing drop of 1,421 points in just under 50 days. Of course, this isn't something that is abnormal, on average the market corrects by 10% once every two years. Of course this year has been one of big ups and big downs, at one point the market was up 1,766 points for the year, or about 14%.
For the record, as you can see from the picture to the right its been a wild year. We have had three short time frames with drops of over 700 points, including two of over 1,000. However, if you had looked at the paper only twice this year, once on January 5th and then tomorrow you would think to yourself that the markets are doing ok, not spectacular, but at least they aren't down.
I know that these market fluctuations can make you feel sick to your stomach, but my advice is not to fret. This is normal and to be expected and the price we pay for longer term higher returns. In fact, this is where you make your money.
What? This is where we make our money, are you crazy?
My sanity aside, I am serious. The most important factor in your long term return is not when you got into the market, but how you acted (or reacted) when the market took its lumps. If you panic and sell you'll be just like everyone else and you'll earn a mediocre return.
In a recent article by Jason Zweig he tells us about how poor timing can hurt us, "In 1982 the total value of the U.S. stock market, as measured by the Wilshire 5000 index, was $1.2 trillion. The index has since returned an average annual rate of 13.3% - enough to turn that $1.2 trillion into $28.2 trillion. Yet the value of Wilshire stocks, as of Sept. 30, was $18.7 trillion, meaning investors earned far less than 13.3% a year. Did $9.5 trillion disappear? And how can investors earn less than their investments?"
Jason goes on to explain that investors earn less than their investments because they jump around to much. They buy whats hot and panic out when things get bad - two big no-no's. Jason's advice - invest in the market at a low cost and refrain from trading (except for rebalancing). In other words, don't panic when the market does what it will inevitably do - go down.
My clients have diversified portfolio's, but I know they are still feeling the effects of the current market fluctuation. I know it is hard, but trust me - you are making your money right now by waiting out the short term fluctuations and staying invested for what will eventually come - the upward movement of the world's greatest companies.
If you have any questions, concerns or comments please feel free to call or shoot me an e-mail - I'm always available to talk.
Scott Dauenhauer, CFP, MSFP, AIF