If you have been a long-time investor you know certain things about not only yourself but the markets as well. You don’t necessarily need to be a student of stocks or even understand the nuances of global economics to grasp the nature of investor behavior. You may be one of those investors who react with each piece of news, good or bad and do what every other investor might be doing. Which if you look at today’s opening, would be to sell, liquidate, take the money and run, turn bearish. Yet, if you were a long-time investor, you would know better.
But imagine today was the first day you ever plunked down a dollar or two to invest. Chances are, you are doing so as a retirement investor, someone who may be making the first investment in their future. Would a stock market as volatile as the one we are in make you hesitate?
If you answered honestly, you would say yes. In your cursory inspection of the investment world around you, you would find a great many other investors, seemingly experienced ones, heading for the hills, crying bear. And you would know that this can’t be a good time to put money in a market that seems to be falling. Everything in your genetic make-up tells you that running into a burning building is not a way to remain free of pain.
Ironically, a little pain is actually a good thing. Let’s take a moment to see if your instincts deserve consideration. A bear market does not happen overnight. In fact, it doesn’t happen over a week, or a month. Investors can change their feelings about the direction of the market for any number of reasons – and we have a boatload of reasons to do so.
Europe seems to be on the verge of economic implosion (but it has been slowly moving in this direction for months and will take a few more months, if not years to finally get itself on the right track again). North Korea is acting up yet again (and the world knows that a war in the Koreas creates some interesting unrest for our Asian neighbors and their allies – mostly us). The US recession although deemed over still seems to persist (with many conflicting numbers pointing towards a brighter future with some growth, some jobs and unfortunately, some inflation).
But failing to invest today is a short-termers thinking. If you are investing for the long-term, this is an opportunity. Keep in mind, this is not your parent’s investment environment. You will not have the long run up that they have experienced from the late eighties to 2007, where just investing meant that your portfolio would grow. All they needed to do was stay invested.
You may not know this, but if your parents did nothing to change their investment choices when 2008 hit (all of us), they would be relatively close to where they were at the close of 2007.
There were plenty of hiccups in the markets to give them reason to pause, retract or even go conservative over that long run-up. But many did not. They believed in the risks they were taking would eventually pay-off and they have. Unless of course they realized they had gotten a bit too aggressive at the same time they realized they weren’t getting any younger.
But what they no longer have, you do. Time. So should you worry about the fate of that first dollar invested? Not really. Here’s why.
Europe will have some problems but the expert you hire in that international fund you are allocating 20% of that dollar to will position themselves to take advantage of those problems. (That is a broad assumption that all international mutual fund managers are good at what they do and at the end of the day, most are.)
Korea will cause all sorts of issues for all sorts of companies but this sort of unrest is a fact of life and your domestic fund managers will be able to parse yet another volatile region of the world into an investment decision. Most of the larger companies in the US are global in nature with customers around the world. They may not be considered international, but their businesses most likely are. (That will impact your large-cap fund that will invest yet another 20% of your first investment dollar.)
The US recession is a battle on numerous fronts with as many possibilities of upside as downside. Small-cap (like the Russell 2000 index of small companies) and Mid-cap (like the S&P 400 index of medium sized companies) mutual funds, making up the remaining part of your newly formed portfolio (at 30% each) will be able to fend off inflation and in doing so, negate the bad news about the future that is beginning to weigh on the minds of old-timey investors.
Inflation is worrisome and although most reports (CPI) suggest it doesn’t really exist, it does and it will impact the value of that dollar you are investing today. Just because the index that tracks it suggests it is benign, doesn’t make it so. What that index doesn’t suggest but should is that the longer you hold onto your cash in the form of cash, the less it will be worth.
Keep in mind, the act of investing, particularly when it is retirement investing, is not an all-in or all-out affair. It is a measured, evenly flowing effort that ignores the ups and downs of the market, allows the news to play itself out and focuses instead over a much longer period than most folks acknowledge. You may not experience that bull markets of your parent’s past but you will have opportunities nonetheless. And if you are reacting to each downturn, you will miss the upsides.
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