Seller Beware!

Panic, anger and fear have been the common themes on Wall Street, and Main Street, for the past six weeks.  And justifiably so!  The chaos within the stock market has rattled even the most seasoned investment veterans.  We have all been faced with tough decisions; some with seemingly no right answer.  It is times like these that a financial professional can provide perspective, guidance and advice.    

Throughout these difficult months, the most common question asked has been:  “Should I move my assets out of equities and into cash?”  Our answer has been and will continue to be NO.  Consider the following:

The Problems with Market Timing

If I could effectively predict the future, this article would have never found its way to print as I would be retired on the beach in a far away land.  Unfortunately for us all, my crystal ball shattered and I am unable to repair it.  While I would love to say that with all the time World Trend spends watching and studying the markets we can forecast certain trends, the reality is that is just not possible.  There are too many forces in play that make rational decisions about future trends impossible to predict. 

At World Trend Financial, we are professional money managers looking out for your best interest.  We cannot prudently act in your best interest by being speculators!  Therefore, we look to historical research for guidance.  For example: 

• Research suggests that since 1926, the stock market has provided a positive return in 59 out of 82 calendar years, or nearly 75% of the time.[i]

The historical trend of the market is up.  While there will be years of negative returns, given time, the market tends to lean in a positive direction.  For long-term investors (a time horizon longer than five years), this should be music to your ears. 

Additionally, most believe that if you have exited the market at its peak you have succeeded.  The problem with this idea is that you must then time your re-entry to the market at its low point.  Making these two correct guesses is a difficult proposition.  While, in theory, this philosophy would be effective, correctly timing these two events may not be worth the gamble.  Keep in mind the following hypothetical example:

• A $10,000 investment in the S&P 500 index from January 1, 1980 through September 30, 2008 would have grown to $243,651.  Had the investment missed just the 5 best market days of that period, the original investment would have grown to only $180,399, a decrease of approximately 26%![ii]

Additionally, missing the 30 best market days during that period would have decreased the value of the portfolio by roughly 73%!

While market timing can be an enticing theory, very few (none?) have proven an ability to successfully do so on a consistent basis.

Another common objection: “There may be a light at the end of the investment tunnel, but our current economic problems are the worst since the Great Depression.”

It is true that we are faced with, or are currently in, a recession.  In addition, unemployment is increasing and the financial system is in disarray.  These concerns are warranted and must be taken seriously.  Coupled with the uncertainty of the “Bail Out” plan, things seem extraordinarily bleak. 

Without trivializing the current problems, our country has been down this path before.  I believe we have the strength and fortitude to move past this period into brighter days.  Again, history provides us a glimpse of the past and a blueprint of the future.  Research provided by Fidelity Investments lends credibility to the notion that we will survive and prosper after we begin the economic recovery process:

• The end of the following historical events have coincided with massive subsequent 5-year market returns:

• The Great Depression (May 1932)                              367%
• Worst Recession of past 25 years (July 1982)             267%
• Fed tightening credit (December 1994)                        251%

Please note:  We cannot guarantee past performance will lead to future success. We can present sound historical examples that speak to the possibilities that exist within down markets.  History has shown numerous times that those who can endure the painful ride down will also enjoy the coinciding ride up.

I hope these examples have highlighted the importance of staying invested through difficult periods.  We understand the frustration, anxiety and fear that comes along with the volatility in the stock market.  However, making decisions based on such emotions is not the prudent way to invest.  That is why the professionals at World Trend Financial work tirelessly to research, analyze and prepare your investments to weather the inevitable storms that come with equity investing.  

We will get through this period.  Please contact us with any questions or concerns you may have.