No matter how you look at it, this market downturn has been particularly painful to most investors, ourselves included. Just 6 mos. ago on Sept 1, 2000, the NAV of the Vanguard 500 Index, a sort of benchmark for other funds, was 140.62; today it's 114.12. That's a drop of 18.4%, adjusted for distributions. The drop for many "pure" growth funds has been even worse. For example, the NAV for the large cap Janus Fund, a Morningstar 4 star fund, has fallen from 48.67 to 29.73 over the same period, or a drop of 29.9%, also adjusted for distributions.
Since most long-term investors have funds such as these (and we think should have them), they therefore have seen the values of their portfolios plunge over this period. If you take into account the prior 6 month period as well (beginning in March of 2000) for many previously wonderfully performing funds, the devastation appears even worse. For example, several of the Janus growth funds (although not the aforementioned Janus Fund) are down over 40, 50, or even 60% since exactly one year ago.
If you are saving for retirement or some other specific goal, it's hard not to feel considerably discouraged right now. The above figures suggest that the typical investor who has the majority of his or her portfolio in stock funds has conservatively seen anywhere from 10 to 20% of their portfolio disappear over the last 6 mos. alone. (This conservative estimate will probably only be true if that investor had at least some of his stock funds invested in categories of funds that have not performed as badly as the typical fund over this period, such as so-called value-oriented funds and some smaller cap funds.)
As a result of these losses, whether merely "on paper" or actually realized, each of us is probably feeling at least some of the following emotions to some degree:
We believe that in long-term investing, you should try not to measure your success up to any particular point, unless of course, that point is truly the point at which you plan stop to investing. On the other hand, if you are investing for the lifetime benefits it can bring, there will always be setbacks during which time you may even begin to re-examine whether the expected benefits will be there at all.
If, however, you are not truly committed to the long term (or need to have your money available for some shorter range date), then you should consider your "regret" as possibly a sign that some real action may indeed be required to prevent your situation from perhaps becoming even worse than it currently is.
As implied above, there can be no guarantees in the world of investing. So the best way to deal with your fears is to prepare yourself for all the possibilities of what the future might hold, both bad and good.
We believe that no one should rely solely on a stock portfolio for all of their future monetary needs. That is, particularly when saving for retirement, for example, you should make sure that a significant proportion of the funds that you will need to be available are not going to be dependent upon even "average performance" in the stock market. Therefore, we feel that you should build up some sources of income in areas away from the stock market, especially the closer you get to your planned retirement years. Such sources might include funds stashed in more stable money market and bond funds, and through options often available for receiving a guaranteed annuity for life in addition to your Social Security or other pension plan.
If, on the other hand, you may have stretched the expected benefits of stock investing to unreasonable extremes, perhaps the fear you feel can help you realize the need to take a more moderated approach.
If you find yourself anxious or depressed about what the current stock market down cycle means with regard to you and your future, you have probably placed too much faith in the view that stock investing will always be the surest, straightest path to achieving your financial goals.
On the contrary, since the stock market is subject to fairly extreme fluctuations, unless you are truly addicted to the life of a trader, the only sensible way to deal with these fluctuations is to take an extremely long-term and, most likely, a well-diversified approach. The stock market will undoubtedly recover and reward those participants who are engaged in a sensible program of balanced investing.
However, avoidance and/or paralysis can be also prove to be harmful in that it prevents us from seeing and acting upon areas within our investment programs that could profit from some modification. For example, given the carnage, does it still make sense to be putting virtually all your new investment dollars (such as those now going into the stock market from your current 401k deductions) into funds that are still overweighted in technology?
But perhaps even far more serious, unfortunately, the majority of investors are now feeling so shell-shocked that they will probably fail to take advantage of the currently available "new investment environment", one characterized by the beginnings of some genuinely lower prices. Lest we forget, these lower prices are now available for the same funds that only a year ago people were willing to pay much higher prices for, even though by all evidence the prices at that time could sensibly be determined to be unreasonably high. But perhaps this is just another complex facet of human nature.
This publication has been around since May, 1999 trying to help the small investor make knowledgeable decisions about mutual fund investments. The following shows quotes from various of our Newsletters during the final 6 mos. of 2000. You should note that in most cases, the advice we offered, although not necessarily widely advocated at the time, turned out to be valuable to anyone who followed it. In some cases, more time will need to pass to determine whether or not our advice will prove helpful.
#29 (July 30, 2000) "... we continue to advocate a somewhat cautious stance, especially for those individuals who insist on holding the kind of aggressive position that worked so well in the last few years"
#30 (Aug. 13, 2000) "I have recommended REIT funds to be a good choice this year, in spite of consistently poor performance in the last few years."
#31 (Sept. 1, 2000) "Most people SAY they would like to acquire wealth and live comfortably without having to worry about money. ... My Newsletters try to present information that can help people accomplish this in a generally safe and sane manner."
#32 (Sept 16, 2000) "Given this strong inverse relationship between what performed well last year [1999] and what has performed well so far this year [2000], we believe that last year's winners will continue to lag in the months ahead."
#33 (Oct 1, 2000) "Not only have we been advising overall caution, but we have particularly emphasized placing at least some of your investments, especially newly invested funds, in one or more of the following categories based on our current reading of the data we carefully monitor: small/mid cap funds, real estate funds, value funds, bond funds, foreign funds, and money market funds."
#34 (Oct 15, 2000) "We advise our readers to move to more aggressive investments only after these investments have gone down further or after (most likely months after) the Federal Reserve has begun to cut interest rates. That will most likely be a while in coming"
#36 (Nov 15, 2000) "Is this a Great Time to Be Buying?"...we suspect that the answer to this [is] probably not. This is because we suspect that the economy may slow more than most people expect with the result of reduced profitability at the majority of companies."
#37 (Dec 2, 2000) "The lure of trying to make truly big bucks quickly within your investment portfolio, even though probably very few are able to accomplish this without racking up large losses as well along the way, will persist."
#38 (Dec 15, 2000) Unfortunately, it is often only wishful thinking which convinces us that [a fund] is so beat up it has to turn around soon. Investing in mutual funds that invest primarily in Japanese stocks has proven to be just such a case - there has still not been a true turnaround for roughly an entire decade! Trends once established usually last far longer than anyone expects"
#39 (Dec 30, 2000) "The following are the fund categories we particularly favor during the first 3 mos. of 2001: Large Cap Value, Mid Cap Value, Small Cap Value, Real Estate, Europe, Bonds. The following fund categories represent those we do not feel will perform particularly well in the first Qtr.: Technology, Japan" [NOTE: So far this year, we have been correct on 7 out of 8 of these categories]
Tom Madell, PhD
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