Finding a Good Time to Invest

When the Dow Jones Industrial Average closed above 12,000 in February 2011 — the first time since June 2008 — it broke an important psychological barrier. It seemed to confirm to many that the stock market could be recovering from the global financial crisis.1When a major index such as the Dow crosses a significant threshold, it can stir optimism among investors and those who have been sitting on the sidelines waiting for the markets to rally. Although there may indeed be good and bad times to invest, the problem is that such periods usually become apparent only in hindsight. Most investors have important financial goals and only a limited time to reach them. Waiting for the “right” moment to invest could prove to be a costly and ineffective strategy.

A Lesson Not Yet Learned
As a result of the 2008 financial crisis and turbulence of the past two years, a growing number of young investors have shunned the stock market. According to the Investment Company Institute, only 34% of people under age 35 say they’re willing to take substantial or above-average risks with their portfolios, down from 48% in 2005.2

The early market experiences of young investors were disappointing, and they learned a hard lesson in market risk — that their portfolios can take a big hit in an economic downturn. But they may not have the perspective of “time in the market” and staying power over the long term.

In fact, a bigger danger for young stock-shy investors could be missing out on potential long-term opportunities. For example, over the 41 10-year holding periods since 1960, stocks lost money in only two periods (see chart). Of course, past performance does not guarantee future results.

Post-2008 Bull Market
From the start of a bull market on March 9, 2009, to February 1, 2011, the Dow’s total return (assuming reinvestment of dividends) was 92%. Investors who purchased stocks mirroring the S&P 500, a broader measure of the stock market, would have nearly doubled their returns (assuming reinvestment of dividends).3
The rise in stocks did not erase all the damage caused by the Great Recession, but it helped many investors recoup a chunk of their losses. Investors who pulled money out of stocks and missed this upswing also missed out on potential gains.

It’s natural to be tempted to make investment decisions based on good news or bad news about the financial markets. But by sticking to a sound investing approach that considers your risk tolerance, time horizon, and long-term goals, you may be able to prevent emotions from taking your portfolio on a rollercoaster ride.
1) Yahoo! Finance, 2011, Dow Jones Industrial Average for the period 1/1/2008 to 2/1/2011. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Rates of return will vary over time, particularly for long-term investments. Actual results will vary.
2) CNNMoney, January 6, 2011
3) CNSNews.com, February 1, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from a Naperville Brokerage Services advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Thursday, August 25, 2011