Tuning Out the Noise

I do not watch television during my workday. This may seem like an odd confession since it is common in some segments of the investment industry to have a television tuned to financial news all day long.

I picture an advisor telling clients: “Investing is for the long term. Don’t worry about what happens every day; just know that over the long term equities rise in value,” …and so on–only to close the office door and wring hands over each swing in the Dow Jones Index or the price of crude oil.

Recently I worked at a computer for several hours in an office with a TV on, tuned to CNBC. Many of you are probably familiar with that channel. I came to the conclusion that steadily rising markets are boring TV. But up and down – well, that’s CNBC’s Super Bowl.

Admittedly, last month was an interesting one for the financial markets. Did our 5-year bull run finally end? Are we in a recession? Will the Fed cut rates? Should the Fed cut rates? What will oil do? How any more homes will be foreclosed? How far down will foreign markets follow ours? Whew! If you sat home and watched this, you would go nuts. Honestly, does anyone really think that knowing the change in the price of sweet light crude every 30 minutes will help with sound, rational financial decisions?

There were recurring bright spots on the TV barrage I endured: every 20 to 30 minutes or so someone would say something like “Of course, no one at home should be selling their long-term investments right now.” Or, “In 3 to 5 years this will not mean much, and you will be very happy with the values of your investment accounts and retirement saving if you just hang in.” And finally, “If you have cash, now would be a time to buy.” But I wonder how many people couldn’t hear this sense through all the noise and made the wrong move?

Last month prompted me to do research on what happens going forward from declines like we have seen in the last couple of months. The following points and the table on the right may help put the recent market swings in perspective.

• Since 1950, the U.S. stock market, as measured by the S&P 500, has declined more than 13% in a three-month period on 10 different occasions.
• In eight of these 10 instances, the stock market rebounded by more than 20% during the following year.
• In seven of the 10 sell-offs, the subsequent rally was large enough to recover more than all of the market’s previous losses.
• As history demonstrates, some of the worst short-term losses were followed by substantial rebounds.
• These snap-back rallies were often as abrupt and difficult to time as the original sell-off.
• In many cases, investors would have been better served by remaining fully invested during the entire period—enduring near-term pain but not missing out on the subsequent rebound.

I cannot predict the changes in the financial markets in the next 12 months. Nor am I suggesting that we are finished with increased market volatility or declines in the next few months. I am suggesting that you consider investments in equities money not to be used for other purposes in the next 3 to 5 years, at least.

If you now work with me you are used to this message and you know you are diversified among several different classes of equities and fixed income, including investments with a low correlation to the broad US stock market.

If you are still one of the skittish, consider the following steps before you take any drastic action:

• Make sure you are allocated appropriately and in line with your target investment policy.
• Add to your cash reserves for a cushion – it may help you sleep better.
• Review your financial plan to be sure the objectives and time frames are current.