Legendary investor Warren Buffett is famous for his
long-term perspective. He has said that he likes to make investments he would
be comfortable holding even if the market shut down for 10 years. Investing
with an eye to the long term is particularly important with stocks.
Historically, equities have typically outperformed bonds, cash, and inflation,
though past performance is no guarantee of future results and those returns
also have involved higher volatility. It can be challenging to have
Buffett-like patience during periods such as 2000-2002, when the stock market
fell for 3 years in a row, or 2008, which was the worst year for the Standard
& Poor’s 500* since the Depression era. Times like those can frazzle the
nerves of any investor, even the pros. With stocks, having an investing
strategy is only half the battle; the other half is being able to stick to it.
Just what is
Your own definition of “long term” is most important, and
will depend in part on your individual financial goals and when you want to
achieve them. A 70-year-old retiree may have a shorter “long term” than a 30
year old who’s saving for retirement.
Your strategy should take into account that the market
will not go in one direction forever–either up or down. However, it’s instructive
to look at various holding periods for equities over the years. Historically,
the shorter your holding period, the greater the chance of experiencing a loss.
It’s true that the S&P 500 showed negative returns for the two 10-year
periods ending in 2008 and 2009, which encompassed both the tech crash and the
credit crisis. However, the last negative-return 10-year period before then
ended in 1939, and each of the trailing 10-year periods since 2010 have also
Trying to second-guess the market can be challenging at
best; even professionals often have trouble. According to “Behavioral Patterns
and Pitfalls of U.S. Investors,” a 2010 Library of Congress report prepared for
the Securities and Exchange Commission, excessive trading often causes
investors to underperform the market.
The Power of
Note: Though past performance is no guarantee of future
results, the odds of achieving a positive return in the stock market have been
much higher over a 5or 10-year period than for a single year. Another study,
“Stock Market Extremes and Portfolio Performance 1926-2004,” initially done by
the University of Michigan in 1994 and updated in 2005, showed that a handful
of months or days account for most market gains and losses. The return dropped
dramatically on a portfolio that was out of the stock market entirely on the 90
best trading days in history. Returns also improved just as dramatically by
avoiding the market’s 90 worst days; the problem, of course, is being able to forecast
which days those will be. Even if you’re able to avoid losses by being out of
the market, will you know when to get back in?
yourself on track
It’s useful to have strategies in place that can help
improve your financial and psychological readiness to take a long-term approach
to investing in equities. Even if you’re not a buy-and-hold investor, a trading
discipline can help you stick to a long-term plan.
Have a game
plan against panic
Having predetermined guidelines that anticipate turbulent
times can help prevent emotion from dictating your decisions. For example, you
might determine in advance that you will take profits when the market rises by
a certain percentage, and buy when the market has fallen by a set percentage.
Or you might take a core-and-satellite approach, using buy-and-hold principles
for most of your portfolio and tactical investing based on a shorter-term
outlook for the rest.
that everything’s relative
Most of the variance in the returns of different
portfolios is based on their respective asset allocations. If you’ve got a
well-diversified portfolio, it might be useful to compare its overall
performance to the S&P 500. If you discover you’ve done better than, say,
the stock market as a whole, you might feel better about your long-term
performance may not reflect past results
Don’t forget to look at how far you’ve come since you
started investing. When you’re focused on day-to-day market movements, it’s
easy to forget the progress you’ve already made. Keeping track of where you
stand relative to not only last year but to 3, 5, and 10 years ago may help you
remember that the current situation is unlikely to last forever.
Some investors try to prepare for volatile periods by
reexamining their allocation to such defensive sectors as consumer staples or
utilities (though like all stocks, those sectors involve their own risks).
Dividends also can help cushion the impact of price swings. If you’re retired
and worried about a market downturn’s impact on your income, think before
reacting. If you sell stock during a period of falling prices simply because
that was your original game plan, you might not get the best price. Moreover,
that sale might also reduce your ability to generate income in later years.
What might it cost you in future returns by selling stocks at a low point if
you don’t need to? Perhaps you could adjust your lifestyle temporarily.
Use cash to
help manage your mindset
Having some cash holdings can be the financial equivalent
of taking deep breaths to relax. It can enhance your ability to act
thoughtfully instead of impulsively. An appropriate asset allocation can help
you have enough resources on hand to prevent having to sell stocks at an
inopportune time to meet ordinary expenses or, if you’ve used leverage, a
A cash cushion coupled with a disciplined investing
strategy can change your perspective on market downturns. Knowing that you’re
positioned to take advantage of a market swoon by picking up bargains may
increase your ability to be patient.
you own and why you own it
When the market goes off the tracks, knowing why you made
a specific investment can help you evaluate whether those reasons still hold.
If you don’t understand why a security is in your portfolio, find out. A stock
may still be a good long-term opportunity even when its price has dropped.
yourself that tomorrow is another day
The market is nothing if not cyclical. Even if you wish
you had sold at what turned out to be a market peak, or regret having sat out a
buying opportunity, you may get another chance. If you’re considering changes,
a volatile market is probably the worst time to turn your portfolio inside out.
Solid asset allocation is still the basis of good investment planning.
to learn from your mistakes
Anyone can look good during bull markets; smart investors
are produced by the inevitable rough patches. Even the best aren’t right all
the time. If an earlier choice now seems rash, sometimes the best strategy is
to take a tax loss, learn from the experience, and apply the lesson to future
source: Calculations by Broadridge based on
total returns on the S&P 500 Index over rolling 1-, 5-, and 10-year periods
between 1926 and 2014.
This material was prepared by Broadridge Investor
Communication Solutions, Inc., and does not necessarily represent the views
of The Retirement Group or FSC Financial Corp. This information should
not be construed as investment advice. Neither the named Representatives nor
Broker/Dealer gives tax or legal advice. All information is believed to be from
reliable sources; however, we make no representation as to its completeness or
accuracy. The publisher is not engaged in rendering legal, accounting or other
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