October 14, 2008

Should You Be Worried About Your Investments?

Mark Hebner offers some much-needed perspective:

Mark Hebner offers a much-needed perspective
Mark Hebner explains why all the hype in the market is nothing new. He addresses investor concerns and encourges weary investors to take the Risk Capacity Survey to re-evaluate their risk. Mark Hebner urges you to watch Weston Wellington's "Is it different this time?" presentation. Mark also announces 1990 Nobel Prize Winner Harry Markowitz joining the ifa team!
Many investors may find themselves questioning their ability to remain in their investments right now. If you are concerned, please remember your time horizon for your investments. If your time horizon or liquidity needs have changed, please take the risk capacity survey to determine if an adjustment in your investments is necessary at this time.

If your risk capacity remains as it was when you invested in your Index Portfolio, we recommend that you stay put and keep your eyes fixed on the long term expected return of your investments.


Time - The Crash (Magazine Cover)With respect to what we are hearing now about the markets, it is critically important to understand that capital markets have shuddered in the past, and have re-emerged through the impressive resilience of capitalism. In fact, sometimes, markets have changed course just when the headlines seem the most apocalyptic.






I have posted to this site an important message from DFA’s Weston Wellington called “Is It Different This Time?” This insightful and informative presentation reveals, in part, that, time after time, headlines have been a poor predictor of future market movements. I encourage you to take some time to view Weston’s research regarding stock market hype in relation to stock market history. Weston Willington's - Is it different this time?
Weston Wellington's "Is it different this time"
Weston Wellington's "Is it different this time?"



Vanguard - John BogleAn important Marketwatch interview with Vanguard founder John Bogle provides further insight as to how to manage investments through this challenging time. He tells us that If you're following the rules of asset allocation, diversification and long-term horizon, stay the course. This is precisely the course IFA clients are on.

When Bogle was asked what individual investors should do now, he said: First, allocate your assets intelligently. If you're in over your head, on margin, you have to get some of your money out of the stock market.


This is sound advice. One way or the other, we are rapidly driving back toward the fundamental lessons of investing.

Many hedge funds that engaged in massive leverage are being washed out of the system. Good riddance. Investment banks that packaged and sold opaque collateralized mortgage tranches will be flung far from the industry, and with any luck, held to task for the misdeeds that have precipitated this market downfall.

Warren Buffett was right. Derivatives are financial weapons of mass destruction.

Certainly, there are some silver linings around this dark cloud. As painful as the last few weeks have been, Investors have learned, many, the hard way, that leverage and lack of transparency carry steep levies. But as we have heard before, when you lose, don’t lose the lesson.

Harry Markowitz Nobel-Prize winning economists and academics have revealed that broad-based diversification among low-cost indexes has shown to be the most prudent investing strategy over time. In fact, 1990 Nobel Prize winner Harry Markowitz, who I am pleased to announce is now an academic consultant to Index Funds Advisors, recently stated:


“In choosing a portfolio they should seek broad diversification, Further, they should understand that equities--and corporate bonds also--involve risk; that markets inevitably fluctuate; and their portfolio should be such that they are willing to ride out the bad as well as the good times."



A diversified strategy may not have prevented losses in this bear market, but, Index Portfolios have not suffered the sort of wipe-outs that have been seen among hedge funds, margin investors, commodities investors, or those who hold a handful of highly correlated investments.

When the markets do turn around, investors who buy and hold risk-appropriate doses of low-cost passively managed index funds will be poised to benefit as soon as the markets react to the unexpected news events that will lift them higher. In the meantime, as long as you invest according to your risk capacity and keep your eyes fixed on your time horizon, you should simply invest and relax.




Mark Hebner addresses the turmoil in the market
Mark Hebner explains who should be worried about their investments and who should not be. Mark wants you to capitalize on the current market conditions and to get invested properly into an index fund. Please take the Risk Capacity Survey to get started.

Reasons why you SHOULD be worried about your investments:
  • Over Concentrated Investments With respect to the recent market turmoil, you should be worried if you are overly concentrated in any one industry, a handful of industries or individual stocks.

  • Unaware of the Risk You are Taking You should be worried if you do not know how much risk you are taking with your investments.

  • Unaware of how Much Risk is Right for You You should be worried if you do not know how much risk is right for you. This is known as your Risk Capacity.
Reasons why you should NOT be worried About your investments:
  • Your Investments are Globally DiversifiedYou have a globally diversified portfolio that is appropriate to your investing time horizon.

  • Your Globally Diversified Investment are Appropriate for your Time Horizon You have a globally diversified portfolio that is appropriate to your investing time horizon.

  • You are Aware of how much Risk you are TakingYou should NOT be worried if you are aware of the risk that you are holding, you know that this risk is appropriate for you and you are comfortable with that risk because you understand how your portfolio has performed since the Great Depression and in subsequent up and down markets since then.

  • You are Properly EducatedYou should NOT worry if you are properly educated regarding stock market activity and you understand that while bad markets are scary, they have had little impact on the returns of investors who remain invested in globally diversified portfolios that invest in tens of thousands of companies throughout the world.


Similar Market Times:
The 1973 and 1974 Market Downturn
How have your investments performed against an Index Portfolio? Click here for 80 years of monthly returns data to compare.
After a 1973 and 1974 market downturn, an incredible 51% of Americans who participated in a 1974 Gallup poll believed that the U.S. was headed for a 1930?s style Great Depression. Two months after that article appeared, the markets turned around and the recovery was in full swing.

After a 1973 and 1974 market downturn, an incredible 51% of Americans who participated in a 1974 Gallup poll believed that the U.S. was headed for a 1930's style Great Depression. Two months after that article appeared, the markets turned around and the recovery was in full swing.




The 1987 Dow lost 508 points in one day (a 23% decline)
In 1987, the markets struggled. The Dow Jones Industrials lost 508.32 points in one day, a 23% decline.

People were scared then, too. In fact, this was a moment when a lot of stock market investors realized that their fascination with the stock market was really an obsession, an addiction that threatened their long-term outlooks.

The New Jersey Compulsive Gambling Helpline reported that in the six weeks that followed that big drop in the Dow, 44% of the calls they received were from stock market addicts. Before that big drop, just about 2% of their calls pertained to the stock market.
Watch Video

Those who were brave enough to face their addiction, to admit that they had gone too far-taken too much risk and had suffered as a result were able to recover, to get help and to have the opportunity to properly invest for a better life and a better financial outlook.

In 1987, the markets struggled. The Dow Jones Industrials lost 508.32 points in one day (a 23% decline). People were scared then, too. In fact, this was a moment when a lot of stock market investors realized that their fascination with the stock market was really an obsession, an addiction that threatened their long-term outlooks. The New Jersey Compulsive Gambling Helpline reported that in the six weeks that followed that big drop in the Dow, 44% of the calls they received were from stock market addicts. Before that big drop, just about 2% of their calls pertained to the stock market. Those who were brave enough to face their addiction, to admit that they had gone too far-taken too much risk and had suffered as a result--were able to recover, to get help and to have the opportunity to properly invest for a better life and a better financial outlook.

 

181 Years of Data
The chart below depicts data from Goldman Sachs. It includes 181 years of data. History shows when stock returns have been as poor as they have been for the last 10 years, the markets have staged a recovery. History never repeats itself exactly, but this data suggest that market collapses have shown to be opportunities for investors.



Index Funds: The 12-Step Program for Active Investors
I urge you to capitalize on the lessons delivered by the current market conditions and get invested properly.

Start right now by taking the Risk Capacity Survey.
Click here to take the RCS

This simple survey can be taken in 5-10 minutes and it will tell you how much risk is right for you, and it will provide you with an Index portfolio that matches your risk capacity. Not only that, all 20 Index Portfolios are low-cost, risk-calibrated, fully transparent, risk/return optimized and carry 80 years of historical data.

I hope you find this data as inspiring as we do at IFA. Every chart, article and video reveals important information that will help you invest properly now and for the rest of your life.

   


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