Articles From the May 1995 Unification News


Why You Should Remain a Long-Term Investor

If you are concerned about market volatility, you may at times question the logic of your investment strategy. If the current performance of your investments is not what you had anticipated, you may be asking yourself, "Should I sit in cash?" or "Should I sell specific holdings?"

These concerns are normal, but they are often driven by emotion. And an emotional decision could adversely affect your portfolio. An article in The Wall Street Journal* addressed six questions investors should ask themselves before changing their investment strategy in a down market cycle.

1. Remember why you are investing. Review your original investment plan. Has your investment time horizon changed in any way? Have there been any lifestyle changes that necessitate the development of a new game plan? Has your risk tolerance changed? If your answers to these three questions are no, don't focus on the short-term performance of your portfolio. Remember you are following an investment strategy that was designed to help you meet your objectives over time.

2. Look at your whole nest egg. Instead of focusing on the individual performance of specific holdings in your portfolio, look at the big picture. How is your portfolio performing as a whole? Do your objectives for this portfolio fit into your overall financial goals?

3. Think in percentages. Percentages are easier to deal with than dollars. Although you may look at the dollars as a loss, you should evaluate your performance relative to appropriate benchmarks to see whether or not your portfolio is performing in line with current investment cycles.

4. Invest regularly. By regularly investing a fixed dollar amount, you get the benefit of dollar cost averaging. You will be able to buy more shares when prices are down. As a result, the average cost of each share you buy will be lower than the average price in the market over the same period. [Of course, dollar cost averaging neither guarantees a profit nor protects against loss in a prolonged declining market environment.]

5. Rebalance your portfolio. Review your original objectives at regular intervals or as your financial needs change. Review your current asset allocation with a financial services professional to determine if it is in line with your long-term goals. Focus on the long term. Changes for short-term gains may have a negative impact on your long-term goals.

6. Rethink your investment time horizon. Has anything changed? If you have 10 years or more to invest, use any market downturns as opportunities to find value.

If you are still not sure about long-term investing, consider a study conducted by Dalbar Financial Services Inc, which showed that the behavior of investors has a significant impact on investment performance. In the Dalbar study, equity fund investors held their investments for an average of 17 to 48 months during the period from January 1, 1984 through September 30, 1993. Their returns ranged from 70% to 90%.** Compare that to the S&P 500, which earned a total return of 293% over the same 10 years. In other words, equity investors who move in and out of investments based on short-term changes in the market underperform investors who stick with a long-term strategy-by a margin of 3 to 1 over a 10-year period.

Equity Investing Over the Long Term: Numbers Tell the Story

Equity investments, when held over the long term, have consistently outperformed fixed income alternatives on an historical basis. According to statistics compiled by the Frank Russell Company, if you had invested $100 in the S&P 500 on December 31, 1986 and held it until June 30, 1994, you would have received a cumulative return of 182.8% (11.9% annualized) for this period. A similar $100 investment in the Lehman Brothers Intermediate Government/Corporate Bond Index over the same period of time would have produced a 77.2% cumulative return (7.9% annualized).***

And, statistics from Ibbotson Associates of Chicago show that if you had invested $100 every month in the S&P 500 from October 1984 through September 1994, for a total of $12,000, the dollar value of your portfolio (including principal and interest) would have grown to $22,528 during this period versus $15,830 for the same investment in Treasury bills.

Both the Ibbotson and Frank Russell statistics include the 1987 market decline and the 1990 bear market. Even during this volatile 10-year period, you can see that you would have been well served to have remained invested in equities. In fact, as charted by Ibbotson, the equity markets have returned an average 9.8% return annually since 1926.**** (Of course, past performance does not indicate future results.)

A Disciplined Investment Approach is Key to Success

In summary, a disciplined and long-term approach is key to investment success. Take time to review your financial objectives with a financial services professional who will work with you to evaluate your portfolio's current performance and to reassess your investment strategy, if needed.

* "Expect Some Bumps and Hang on for the Long Haul," The Wall Street Journal, October 25, 1991

** Dalbar Financial Services Inc., Boston, MA

*** The Frank Russell Company

**** Ibbotson Associates, Chicago


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