Kathryn Head is a very smart lady. She's president of First Investors Corporation and knows her cookies.
A lot of people have called and written me with respect to the problems with the stock market. Naturally, I don't have any answers but Ms. Head certainly does. She points out that with the stock market producing disappointing results and the financial media reporting so much bad news, many investors are nervous. That's an understatement. It seems to me they are panicked.
Ms. Head notes that with emotions running so high, "it may seem tempting to get out of the stock market before more money is lost." However, she adds, "Investment decisions that are based on such emotions generally prove to be poor ones."
First of all, she refers to a recent study by Dalbar, a well-respected financial research firm. Dalbar says that the average U.S. stock mutual fund returned an average of 13.1 percent annually over the period between 1984 and 2000, but the average investor in these funds earned a return of only 5.3 percent over that same period.
So, the obvious question is why did investors miss?
Ms. Head says that one key reason is that investors failed to remain invested in stock funds during down periods. She points to the fact that some investors fled the market after the Black Monday crash of 1987 and didn't benefit from the sharp rebound that followed. Others jumped out in 1990 when a slowing economy plus the pending Gulf war led to a market downturn. What happened was that these investors simply missed the 31 percent gain in 1991.
Basically, those who ignore all the short-term noise in favor of sticking with long-term plans are generally rewarded. But, keep this in mind. Between 1975 and 2001, the S&P 500 produced an annual return of 14.2 percent. An investor who missed (there's that word again) the 40 best days in that period would have earned a return of only 7.6 percent. It is not surprising that many of the best days in the history of the market have occurred after prolonged periods of weakness.
Also, when 10-year periods are considered, the stock market itself has generated positive results more than 97 percent of the time so that a long-term investment horizon helps mitigate the risks inherent in the stock market.
Ms. Head notes that although we can't predict what will happen, based upon history it's somewhat "reasonable to believe that the longer it takes for the turnaround to occur, the more powerful the rebound will be." She adds, "While many investors will try to time this turnaround, most will simply get it wrong."
So, the bottom line is that the disciplined investor who maintains a commitment to a balanced portfolio (and that's the name of the game) will be well positioned to reap the benefits.
