By: Investor Solutions, Inc.
My mom always told me that in every painful experience there lies a very powerful lesson. Same theory holds true in the world of investing.
The year 2000 started off with a vigorous sprint, piggybacking on the phenomenal success of previous years. Then spring came and all of a sudden the train just lost its steam. Things just never seemed to recover for the rest of year. Markets go up, markets go down, and that-s the nature of the beast. Despite this year-s market gloom and doom, we should all walk away with several valuable lessons:
What goes up must come down
Let-s face it, there are investors in this world that actually thought the bull would never stop running. Come on- I know you-re out there! The vertical performance of the market has been unprecedented. Unfortunately, the last five years have ‘trained’ investors to expect consistent, double digit returns with no risk. But, all good things must come to an end and the year 2000 served as a reality check for many that were living in a market bubble.
Chasing yesterday-s returns is a losing strategy
The NASDAQ blew everyone away in 1999 racking up over 80% in annual returns. Like lemmings to the sea, those that blindly followed the herd got hurt and hurt bad. Investors that loaded up on tech late last year are now being severely punished. Last year-s big winner is down a whopping 40%! Ouch, now that-s a painful lesson if you asked me.
Long-term perspectives keep it real-
Okay, so performance for this year was nothing to write home about. So what!? Most investors (notice I say investors, not gamblers) are in it for the long run. The majority are socking away for retirement, which means this money may not be touched for some fifteen, twenty or thirty years down the road. So, suck it up and deal with it. That-s the nature of the market.
Focusing on short-term fluctuations is just a bunch of ‘noise’. Jumping in and out of the market or trying to guess its next direction is useless and highly ineffective. Following the market buzz from all the talking heads in the media is counterproductive. Forget all the hype and just focus!
As a retiree, you may have some reason to be concerned. But only if your asset allocation strategy did not accurately reflect a) your risk tolerance b) your liquidity needs and c) your time horizon. Hopefully you-ve already factored in the probability of risk by including sufficient bonds/cash equivalents for capital preservation and liquidity needs.
Remember, if you want to be a long-term investor, act like one!
Diversification is critical
Your best protection in a volatile market like 2000 is proper diversification. Piling into just one or two asset classes increases your exposure to risk.
Oftentimes, people don-t even realize how un-diversified they truly are. I can-t tell you the number of cases I-ve seen where a person thinks they-re diversified because they own a gazillion different mutual funds, when in actuality, those funds are investing in all the same companies!
By mixing up asset classes that have low correlations with one another increases your chance of success.
Excessive trading hurts
Technology has made it awfully tempting and so easy to shoot ourselves in the foot, hasn-t it? Hey, at the click of a button we can move thousands, even millions from one account, fund, or stock to another. Neat!
But, excessive trading has a consequence: transactions fees, taxes (in some cases) and missed opportunities. Do yourselves a favor; get your finger off the trigger. Trading for the sake of trading is expensive. Develop a long-term strategy and stick to it. Portfolio turnover should really be limited to rebalancing, distribution requirements and tax planning.
So as the year winds down and the parties rev up, we reflect on our experiences and toast to our newfound enlightenment. If you made some mistakes, learn from them. If you didn-t lose your shorts, count your blessings. The point is, if you lay down a proper foundation and stay disciplined, you will be much better poised for long-term success.