As I prepared for this quarter’s newsletter, I immediately started to reminisce about last year, which was unbelievable. I remember that certain firms, at the beginning of 2008, said that oil was going to $200 per barrel. Now we are looking at $40 per barrel. I also remember economists saying in mid-2007 that we might enter a “softening” period in the market, and we ended up seeing the S&P500 down almost 40 percent for the year.
Believe me, no one knew that this market decline was going to be this hard and deep. Just like no one was predicting $35 per barrel for oil, no one was predicting a 40 percent decline in the market either. We also know from looking back through market ups and downs that it doesn’t typically pay to move money in and out of the market based upon emotion. Emotion in the long run will hurt us as investors. Although it is easy to say that we should have gotten out, how difficult is it to say when we should get back in? As our emotions cycle around this market, we typically get out when we should be getting in.
The best way to invest over the long term is to pick a clear, defined strategy and to stick with it. Our clients are long-term investors who know that they need to be diversified and also need to manage the risk associated with their investments.
At iWealth we help our clients manage the risk associated with saving, investing and managing money. There are five key principles that need to be adhered to, especially now.
- First, you must have professional management of your funds. Studies have revealed that although the stock market is returning 10 percent a year on average, typical investors have returned much less than that. Why? Because they have been selling when they should be buying. You must have a good manager in place to help you.
- Second, you need to have proper diversification. At iWealth we believe that our clients should not own more than five percent in any one company. Having 10 percent of your investable dollars in Apple stock is not proper diversification.
- Follow asset allocation guidelines. You need to invest in different parts of the economy including bonds. For example, owning Ford and GM is not diversification, but owning Ford, Target and a Treasury bond is diversification.*
- The fourth principle is dollar-cost averaging.** For example, when you invest in your 401(k) at work every pay period, you are buying more shares on sale than at a premium, when you average things out over time. This is especially true right now. Keep purchasing those shares.
- Last, insure what you can’t replace, things that you can’t afford to lose. If your home were lost in a fire, it would be catastrophic. Insurance doesn’t cost all that much because a fire (or other crisis) has a low probability of happening, and it makes sense to insure against losses.
If you are following these five sound principles, you will be just fine. But you always need to reassess your investment goals, whether you are on a path to achieving them, and whether they have changed. Many people have been paralyzed by what has happened to the markets, but we cannot afford not to review and reassess our investments. This year, make sure you have a recovery plan in place.
In closing, we wish you the very best and want you to know that we are here for you, your family and your friends. Many clients have been calling and asking us if we would visit with a friend, co-worker or relative who is struggling with what is going on in the economy and markets. Call our office, and we will be happy to help.
*Diversification and asset allocation do not guarantee positive results. Loss, including
loss of principal may result.
**Dollar cost averaging will not guarantee a profit or protect against a loss in a declining
market. Please consider carefully your ability to continue to purchase through periods of
low price levels.