The September 11th attack
Unstable times an extra challenge for investors
USA Today
Crazy times demand sane strategies. Sure, other investors are behaving irrationally — selling long-held stocks, playing with options.
A period of volatility in the stock markets is to be expected in the aftermath of the terrorist attacks on the United States. But so is an eventual recovery, experts say. To protect your investments - and possibly make money - during the volatility, analysts offer these tips: Don't panic. "People need to step back a little bit and not have such a knee-jerk reaction," said Ken Weiss, senior vice president of investments and senior portfolio manager at Prudential Securities. Review short- and long-term goals: Whether you sell a losing stock or buy on the dip depends on your portfolio's balance and when you need the money. Consider selling something to take a capital loss and put the proceeds into another industry that will be less affected. Consider low-risk investments for the short term. Some experts recommend buying Treasury securities until the stock market bottoms out. Consider stocks in solid sectors. With last week's selloff based largely on emotion, the fundamentals of many companies are still strong. Their stock prices will rebound with time. "There's always a way to make money, you just have to have your dollars positioned to do so," Burse said. - Cincinnati Enquirer
But that's no reason for you to behave badly. Making long-term investment decisions in extraordinary times usually means big regrets later. So here are some pointers for dealing with your portfolio now.
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How you can protect investments
• Use time wisely. If you are saving for a goal that's 10 years or more in the future, stocks usually give the highest returns. We don't know whether your average annual returns will be 5 percent, 10 percent or 15 percent. But for most 10-year periods since 1960, stocks have beaten bonds or money market mutual funds.
For example, the Standard & Poor's 500-stock index has gained an average 12.4 percent a year the past 50 years, including reinvested dividends, according to Ned Davis Research. Long-term government bonds have gained 7.4 percent, Treasury bills 6.3 percent.
Most times, investors who have held stocks for 10 years have fared well. We looked at 10-year holding periods for the Standard & Poor's 500-stock index and 3-month Treasury bills. The first period started Dec. 31, 1959; the next period started 3 months later. All told, we looked at 127 10-year periods between Dec. 31, 1959, and Aug. 31, 2001.
The S&P 500 had no losing 10-year period. It beat three-month T-bills 76 percent of all the 10-year periods. (The losing periods were during the 1970s, when stocks slumped and T-bill yields soared above 15 percent.) Using 15-year time periods — an admittedly smaller sample — the S&P 500 beat T-bills every time.
• Rebalance. The bear market has probably made your portfolio so unbalanced it's dizzy. For example, suppose you put $6,000 in the Vanguard 500 Index fund and $4,000 in the Income Fund of America, a bond fund, a 60/40 split between stocks and bonds.
Unfortunately, you make your investment on March 31, 2000. Thanks to the bear market, you now have $9,300, split almost evenly between bonds and stocks. It's time to move some money from your bond fund to your stock fund.
Regular rebalancing between stocks and bonds doesn't make much sense. Stocks often rise when bonds fall, and vice versa. It's a remarkably self-balancing mechanism. But in severe downturns — like this one — it makes sense to rebalance when your portfolio is 10 percentage points or more off track. You'll be buying low and selling high.
• Rebalance again. Money managers fall into two broad camps: value investors, who look for bargains among beaten-up stocks, and growth investors, who look for red-hot earnings growth. Debate has raged for years over which investment philosophy is better. But here's a secret: Both philosophies have times when they beat the other. And most investors have a mix of both.
The Lipper Large-Company Growth index is down an astonishing 45 percent since March 2000. The Lipper Large-Company Value Index is down 7.2 percent. Predictably, value managers are doing little victory dances.
But someday growth fund managers will be up and dancing again. That won't happen until earnings growth starts heating up, and that probably won't be until January — at the earliest.
• Remember dividends. Value funds have fared well, in part, because they invest in stocks that pay dividends. When technology stocks were hot, investors scoffed at dividends. Why look for cash payouts from companies when you could get a soaring stock price?
Well, here's the answer: Over time, dividends are an enormous part of the total return from stocks. The S&P 500 rose 187 percent the past 10 years without dividends. With dividends, the index has risen 253 percent.
If you're worried about buying stocks now, consider investing in stocks or funds with decent dividend payouts. Ford Motor, for example, now has a 7.3 percent dividend yield. American Electric Power pays 5.3 percent. Fund investors might consider an equity-income fund, which invests in large, dividend-paying companies. One good choice: American Century Equity Income, up 22.8 percent the past 12 months.
