Look before selling
NEW YORK – From an early age, people are trained to act quickly when they hear sounds of emergency: fire alarms, police sirens, even car horns. So while it might be difficult for investors who hear alarm bells on Wall Street, often the wisest reaction is to stand still.
The volatility seen in stocks and bonds in recent weeks no doubt triggered concern among some investors. The sometimes sharp pullbacks in the markets were reason enough to get out for some investors, as data on mutual fund outflows have shown. But those investors who still have enough time before they need to draw on their investments are often better served by staying put.
With headlines about a slumping housing market and tight credit roiling Wall Street, short-term stock market returns have taken a hit. Even though stocks touched highs as recently as late July, each of the U.S. investment styles tracked by Standard & Poor’s showed losses in July.
By size, S&P said last month the average large-cap stock fell 3.10 percent, the average midcap stock fell 4.30 percent and the average small-cap stock lost 5.04 percent. The good news: The major stock market indexes are up for the year to date.
“I think it would be something other than normal if someone saw what was going on and weren’t concerned and weren’t a bit confused about what to do,” said Steve Schoepke, vice president of research and product development at AIG SunAmerica Asset Management.
While he said investors should question what’s going on in the markets and consider whether their investment strategy still makes sense, long-term investors should take a wide view on their asset allocation designs.
“These strategies are not meant to be used based on a short-term horizon,” Schoepke said. Instead, investors should first consider where they are invested and for how long. “That should really be the guiding principle for not only where to invest but how to invest,” he said.
Too often, he said, investors don’t pay attention to their holdings until big moves in the market draw their attention. One of the smartest actions investors can take so they don’t feel as compelled to take flight during market hiccups is to begin investing early and regularly.
Investors who get out of the market and miss only a few strong days can quickly fall behind other investors. Fidelity Investments, the nation’s largest fund manager, found that someone who invested $10,000 in the S&P 500 from 1980 through early August of this year would have seen the value of their investment balloon to $299,215. But had they missed even the market’s five best days, their investment would be worth $77,039 less. Missing the best 10 days would cost that investor $124,470 over that time.
So while times of upheaval can make investors want to look for cover, the smarter response might be to revisit an investment strategy, tweak it and avoid draconian measures such as exiting a market.
© Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.