Wednesday, July 02, 2008

Navigating Investments In Turbulent Times

"These are the times that try men's souls." ~ Thomas Paine

In volatile markets, like the one we are experiencing, it is easy to get whipsawed by market changes. Many 401K accounts have declined. Recent stock purchases have negative returns. I admit, I've panicked at times in the past, sometimes selling a stock near the bottom (e.g. Best Buy in June 1997 before its meteoric rise) or not being in stocks as the market recovered (e.g. 2003).

Here is what I've learned in my 23 years of investing:
  • Develop an investing plan for both bull and bear markets. As Peter Lynch once said, "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."

    A good plan will enable one to feel comfortable during both bull and bear markets. To me, a bear market is the major test of one's plans.

    My overall investment approach with personal funds has been one of short term capital preservation, and we allocate our investments accordingly. Our savings and IRAs have typically been 50-80% money market/CDs/bonds and 20-50% equities. However, for my company retirement account, we've taken much higher risk. It has been 100% invested in equities, specifically my company stock. Since retiring, we've reduced the exposure to company stock by about 33% and replaced it with a diversified stock portfolio.

    Even with the market declines, I can still sleep at nights, primarily because of the funds in the money market/CDs and bonds. Yes, our returns are not as high during a bull market. However, the lost gain is worth it to reduce the pain during the bear market.

  • Choose good quality stocks. In a bull market, poor stock picking skills are often forgiven. That's because all stocks can rise in a a strong bull market. However, a bear market is less forgiving. While both good and poor companies decline in a bear market, poor companies sometimes no longer exist at the end.

    I used to think that I could identify inexpensive stocks with turnaround potential and be rewarded great returns. Wrong! I learned the hard way that poor companies often continue to do worse, especially in declining markets.

    So now I tend to stick with strong companies with good management and excellent business models, especially if it has been successful through a recession.

  • Remember that history and statistics will likely prevail. The stock market is cyclical. Bear markets are followed by bull markets and vice-versa. Over the long term, the stock market has had 8-12% returns depending on the time frame chose. With time, this bear market will also pass. And then one can reap the benefit of a good investing plan.

  • An investing plan needs to be customized for each individual. I want a plan that works best for me, and often, another person's plan won't work as well for me. Investing in overall market index funds and dollar cost averaging can be one good plan. Asset allocation with periodic rebalancing may be another. However, if I did it over again, I would probably still divide my personal savings into 20% stocks and 80% CDs/bonds, because that split best matches my tolerance for risk.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial or investment advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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