6 Tips on
Coping with
Market Turmoil
6 Tips on
Coping with
Market Turmoil
by David Tripple, President
Pioneer Investment Management
The
violent swings in US stock market performance thus far in 1998 have left
many investors confused and nervous. Those who enjoyed the strong bull market
of the past three years are seriously questioning why they shouldn't take
their prior-year profits now as the market has slid from its July 17 high.
Investors are also worried that the continuing Asian and Russian economic
crises will hurt U.S. companies that have relied on Asia for substantial
parts of their business or have invested in Russia. And political uncertainty
in Russia has added another dimension of concern. On the other hand, market
reboundssuch as those in late April, June, and Septemberwhich can be brief
as one day, make others wonder if they should sell to lock in these gains.
As
the market displays more volatility, many investors have become uncertain
and are tempted to respond hastily. Yet a bail-out strategy on either dip
or surge is hard to justify if your goal is long-term. There is always an
active debate over the market's "appropriate" level and its short-term
direction. So what's an investor to do? Here are six tips on how to stay
calm amid market unrest:
Shun emotional, knee-jerk reactions to big market moves, up or
down. Make even-handed decisions
between dumping and chasing securities after big days or weeks. If the market
dives and everyone around you is dumping stocks, panic is understandable.
But it's usually a mistake to follow a panicking herd. While past performance
is no guarantee of future results, remember that over time, the stock market
as a whole has moved upward, recovering from even the sharpest correction.
On the other hand, chasing a high flier merely because it has risen quickly
may expose you to equally rapid declines, especially if movement is based
more on sentiment than substantive news or analysis.
In
the 753 10-year periods rolling by month from January 1926 through August
1998, the total return of the Standard & Poors Composite Index of 500
Stocks (S&P) has been positive 96% of the time. In fact, the S&P
hasn't had a negative 10-year period since 1941. In 84% of these ten-year
periods, the S&P's return has exceededoften substantiallywhat you could
have earned in a bank. And, if you're already in the market, you're positioned
to catch unexpected moves. Of course, you can't invest directly in an index.
Take the long view. Even
the experts have great difficulty getting their market timing right and
individual investors should not expect to do any better. Successful investing
means keeping a long-term perspective rather than trading in and out of
the market, and this is even more true in today's volatile conditions. Remember
the power of compounding: over seven years a portfolio which returns 10%
a year will double in value. Of course, this illustration does not reflect
the performance of any specific investment, and there is no assurance that
the market will return 10% in any given year, however, Ibbotson research
shows that over the past 70 years, the average annual total return on the
S&P is 10.7%.
Understand what you own. When
investors hear comments about the market's valuation, they often assume
that the same things are true of their portfolio and of their mutual funds.
but, unless you own an index fund, the index isn't telling you the true
story of price or value. The S&P 500 may sell at an average of 23x times
earnings, but individual companies in the S&P may sell for as little
as 5x earnings, or as much as 50x earnings. In addition, people usually
describe the market using only one or two characteristics, and these provide
only a partial picture. Stocks move for a wide variety of reasons, and the
price of some companies will rise with the general tide; others may be left
behind without reflection of their true value. In short, the market as a
whole does not necessarily reflect individual stocks.
Although
we believe true value will ultimately dictate the proper equilibrium price,
it comes to different individual companies at different times. Therefore,
it is wise to focus on the products and positioning of individual firms
(or on mutual funds that focus their analysis on individual firms)and not
be swept away by general market pundits., What's in the headlines may not
be what you own, or ought to own.
Keep your asset allocation targets in sight. Wise investors allocate their assets between stocks, bonds, and
cash according to their own particular profile. For example, an aggressive
investor with more than ten years until retirement might have 85% in stocks
or stock funds and 15% in bonds. A conservative investor in the same position
might allocate only half to stocks, 35% to bonds and 15% to cash. Whatever
the mix, it should be reviewed at regular intervals and adjustments made
as necessary; a falling stock market may mean that you should actually increase
stock purchases.
Consider the tax implications of portfolio changes. Although investment decisions should rarely be
made on the basis of tax considerations alone, these must be taken into
account. Sale of a stock or mutual fund which has appreciated over time
could trigger a taxable capital gain which could well be substantial. If
you must sell, try to match any gains with corresponding losses to keep
your tax liability to a minimum.
Consult a financial adviser. Just
as you would call a doctor if you're seriously concerned about your health,
seek advice from a professional when financial matters are troubling you.
Investment decisions can have serious consequences and it's well worth getting
counsel before taken action. Ask a friend or colleague for a recommendation,
or consult your local listing of financial advisors.
Editor's Note: David D Tripple is President, Pioneer Investment Management.
To receive a prospectus on any Pioneer fund, call 1-800-225-6292. Read the
prospectus carefully before you invest or send money.
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