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By Richard L. Kesner, President
The CommonWealth Group
Ladies and gentlemen: please be advised that you enter this ride of your own free will, and it is you who will in the long run determine the nature of the ride. Children under 18 must be accompanied by an adult. Please keep your arms and legs in the moving vehicle as the safety bar secures itself. Warning: this ride has been known to have sudden dips and unexpected turns. Some people experience dizziness, nausea, severe depression, as well as elation and strong bursts of adrenaline. Feel free to press the emergency button on the panel to stop at any time. Every ride is guaranteed to be different, and everyone will have a unique experience. Are you ready? Let’s go – this is the world’s most popular roller coaster! Here comes the opening bell, hang on tight the Stock Market Roller Coaster has begun!
Even some of the people who enjoy roller coasters, sky-diving, bungee jumping, and all sorts of adrenaline stirring activities are having a difficult time stomaching the turbulence of this market. The past few years have indeed been a wild ride, with tech stocks and large cap growth companies leading the market to new heights. Earnings disappointments, interest rate scares, and the unknown phenomenon of Y2K have resulted in a plummeting value of the DOW as quickly as it rose. Many investors are scared, queasy at best and ready to bail. We can see how emotions would make one want to join this strategy, but The Commonwealth Group, Inc. thinks you should hang on to that safety bar, take another Dramamine, and hold on for the entire ride. Here’s why:
The Crystal Ball Doesn’t Work
Timing the market doesn’t work. How long have we heard that strategy preached to us? One of the most annoying things about cliches is often they are true. Nobody knows where stocks are headed in the weeks and months ahead, so it is foolish to start making big market bets. True, lots of opinions have been given by “experts” and “analysts” on the direction of the market. They might even sound convincing. But the reality is, market forecasters have the sort of track record that makes the psychics on infomercials look good.
With market timing, there is one key point to remember: not only do you have to bail out of the right stocks that are going lower, but you have to successfully re-enter the market before they turn around and the market sprints back up. That means making two very astute market calls. The odds are against you. First of all, over time, stocks have continued to rise in value. If you sell now, history suggests you will be wrong. Second, when the market does rise, it tends to climb quickly. If you are sitting on the edge waiting for the right moment to jump aboard, it is all too easy to miss out on a major stock market advance.
You Will Pay Dearly
Not only might you incur huge commissions if you sell out of all of your holdings, you could also pay a fortune in capital gains (if the stocks are held in a taxable account). Even if you aren’t paying taxes, not only do you have to sell out at the stocks high enough to make a profit and cover the commissions, you also have to make enough to cover the commissions of repurchasing the stock at a lower price. This is difficult to do. Especially with the tendency of the market to rise very quickly when it does sprint up.
Stocks Will Deliver
Even after the recent slide, there is no doubt stocks are still highly priced. But for those who invest regularly, and diversify broadly, stocks remain an attractive LONG TERM investment. Over a five-year holding period, stocks have almost always made money. In fact, over a 10-year period, they have usually done better than the two main alternatives, bonds and cash.
Scott Lummer, chief investment officer at 401k Forum, a San Francisco investment advisor stated, “You have to go back to the 1930s to find 10-year periods when bonds beat stocks.” In fact, research from Frontier Analytics out of San Diego, California shows that starting with an initial investment of $10,000 – cash compounded at the rate of 4% over 25 years; bonds 8% over 25 years, and stocks 10% over 25 years. This adds up to a value of $42,465; $70,559; and $187,613 respectively. The ride might seem bumpier, and the volatility might make you queasy at times – but the past has shown that the rewards are worth it for you to hang in there and ride it out.
This, Too, Shall Pass
Remember the market swoons in the summer of 1996, the spring and fall of 1997? Neither do we. The market is always falling apart. For stock-market investors, this is the price of doing business. Your best bet is to ignore all the fuss and sit tight. In the long run, we believe that the stock market will do what we all are hoping it shall do, make everyone money. Just hold on to that safety bar, and close your eyes if heights and drops bother you – but if you ride the entire way we think you’ll end up a winner.
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