Long-term retirement investors should keep their focus on their goals and not on short-term market fluctuations, including even the recent Sept. 15 sell-off that resulted in the single worst trading day since the Sept. 11, 2001, terrorist attacks.
Bad news in the financial services sector of the market — the bankruptcy filing of investment bank Lehman Brothers, the purchase by Bank of America of Merrill Lynch and reported cash problems for insurance giant AIG — led jittery investors to flee stocks and caused the market’s drop.
While the 500+ point drop in the Dow Jones Industrials was significant, there was a modest rebound Sept. 16. Also, the Federal Reserve announced Sept. 16 that it would lend up to $85 billion to AIG in order to protect the financial system.
Additional negative news was announced Sept. 16, as shares of a large money market mutual fund “broke the buck” — fell below the standard $1 a share net asset value due to holdings in Lehman Brothers securities.
Money market funds have long been considered relatively safe because of their investments in high-quality, short-term securities. GuideStone Funds’ Money Market Fund strives to provide safety and security for its participants’ cash investments.
GuideStone Funds’ Money Market Fund continues to maintain a constant $1 per share net asset value and seeks to maintain that value in the future. The fund has no exposure to any Lehman Brothers obligation.
“Certainly, many investors are alarmed by what happened with the markets (Sept. 15),” said Rodric E. Cummins, chief investment officer of GuideStone Financial Resources. “The important thing for investors is to remain calm, consider your financial goals and not to let your emotions guide investment decisions.”
GuideStone continues to stress important principles for navigating today’s troubled markets:
- Always focus on your objectives, not your emotions.
Specifically regarding retirement participants, these assets are to serve needs for a long period of time. Make sure your objectives and actions are consistent with your time horizon.
Participants can periodically review their risk tolerance by utilizing GuideStone’s Investor Profile Quiz, found in the Fund Choices booklet and on GuideStone’s Web site at www.GuideStone.org. Participants also can request a copy of Fund Choices by calling GuideStone’s Customer Relations specialists at 1-888-984-8433.
Consider that over long time periods the stock market has yielded many more positive returns than negative ones.
Industry research firm Ned Davis Research, Inc., looked at stock performance over an 80-year period, 1926 and 2006. What the studies found was that:
- 88 percent of the five-year periods and 97 percent of the 10-year periods yielded positive returns.
- 100 percent of the 20-year periods yielded a positive return.
Essentially, you could choose any five-year period of time between 1926 and 2006, and almost nine out of 10 of them would show growth in an investor’s portfolio.
While past performance is no guarantee of future performance, the market itself has been resilient through the years.
- Avoid making impulsive decisions.
Guard against making ad hoc changes in your portfolio. Making changes based on short-term market movements is almost a guarantee for failure as it promotes “buying high and selling low.”
The performance of your account moving forward will be determined based on results of the financial markets in the future, not the past.
Selling today cannot avoid yesterday’s losses in a down market. Likewise, in an up market, you cannot buy yesterday’s performance by investing in the hottest fund.
If you absolutely have to make changes in your portfolio, consider making them in small increments. This allows you to dollar cost average and gives you time to more seriously consider your actions.
Getting out of the market during roller-coaster rides is seldom a smart move. What happens if you’re out of the market and the market goes up? Consider an investor who invested in an S&P 500® Index fund from January 1985 until March 2007.
An investor who parked his money there for all 5,607 trading days would have an average annualized return of 12.8 percent. That period includes “Black Monday,” Oct. 19, 1987, the tech bubble burst of 2001 and the Sept. 11, 2001, terrorist attacks.
On the other hand, consider another investor who got jittery every time the market pendulum swung from profit to loss. He missed the 10 best days over the course of those 12 years and the average annualized return drops to 10.2 percent; miss the 30 best days, and the average annualized return is 6.6 percent.
If one misses the 50 best days of market performance, the annual average return drops to 3.7 percent — barely above the rate of bank certificates of deposits.
- Don’t count your losses.
Tallying up how much has been lost in your account serves no purpose. If you want to measure the progress/status of your investment account, focus on the gains realized in the equity (stock) markets over longer periods of time.
“It may seem difficult as investors watch their account balances decline, but the reality is that a focused investment discipline, diversification and persistence will likely be the key to weathering this and other storms,” Cummins said.
“While lower market prices do cause uncertainty, this can also be an excellent time for opportunistic investors to move into the market while values are off their highs.”
Market volatility and indiscriminate selling of assets by others often creates investment opportunities that can be captured by insightful investors whose long-term financial objectives are properly tuned to long-term investment strategies.
Consistent contribution to a retirement plan affords investors a systematic way of taking advantage of investment opportunities as markets ebb and flow.
- Maintain realistic expectations about market behavior.
Financial markets move up and down over time in response to social, political and economic events.
Further, equity investments are by nature more volatile than other asset classes such as cash and bonds. Equity investors should be able to accept significant short-term fluctuations in the value of their portfolios.
“Markets negatively react to uncertainty,” Cummins said. “As situations begin to return to normal, we expect to see the markets stabilize and, if history is any guide, begin to return to profitability.”
Investors may still be confused. GuideStone offers a simplified approach to investing over the long-haul.
Many times the demands of ministering to a congregation or preparing three sermons a week leaves you with little time to think about how you are going to invest for your retirement. That’s why GuideStone Funds launched a new series of mutual funds, the MyDestination FundsTM.
These funds are date-target or life-cycle funds which are diversified “funds-of-funds” that have an asset allocation that gradually becomes more conservative as you approach and move through retirement.
You simply choose the fund closest to your retirement date, make appropriate contributions, and the asset allocation is adjusted to become more conservative as you approach that retirement date.
The MyDestination FundsTM may be a smart choice for an investor who desires a simple investing approach, wants professional management with automatic reallocation and is willing to pay an additional expense in order to receive a more comprehensive level of asset management services. (GuideStone)
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