brown on green, A Regular column about finances
Just Hang On!
The stock market has experienced much volatility in early 2016. At the Foundation, people often ask what they should do. Many investment objectives of the funds managed by the Foundation are long term. We manage planned gifts with a 20-40 year horizon and an endowment fund that theoretically has no end (other than the return of Jesus) to its time horizon. With these horizons in mind, the Foundation has never jumped in and out of the market when there are downturns.
Consider a few events over the last 25 years. On October 27, 1997, a global stock market crash caused by an economic crisis in Asia sent the S&P 500 spiraling down 7% in one day. The market recovered quickly and was up 10% within two months. The September 11, 2001, attacks caused the market to sink 11.5%, but again, it rebounded within two months.
The stock market crash of 2002 was one of the worst market downturns in history. It was a slow fall, as the market declined almost 33% from the beginning of the year until it reached its low on October 9. This time, it took 18 months to recover. The 2007-2009 bear market will long be remembered. Another long drop took 17 months before reaching the bottom, and the market declined almost 57%. It took four years for the S&P 500 to recover from the downturn.
In each of these situations, the Foundation just waited for the market to recover. Many studies have demonstrated that jumping in and out of the market during downturns is a recipe for disaster. “Timing” the market requires investors get it “just right” twice. Market-timers first must sell when the market reaches its exact peak and then time the exact bottom of the market to reinvest. Most market-timers miss both the top and the bottom; they experience realized losses when they jump out and miss many of the big gains as the market recovers while trying to time the bottom.
One of the fundamental rules of investing is to buy low and sell high. Unfortunately, many market-timers will sell late in a panic and buy late after some of the biggest days of recovery are past. This defeats the goal of selling low and buying high.
How you invest depends on your time horizon. Those within five years of retirement should have a more conservative strategy than those with more time. People nearing retirement, with a time horizon of less than five years, should begin reducing exposure to stock because there is not have enough time to recover if the stock market declines severely.
In most instances, though, when the markets decline, and you are a long-term investor, follow the Foundation’s example and just hang on!
About the Writer: David Brown, CPA, became director of the Free Will Baptist Foundation in 2007. Send your questions to David at firstname.lastname@example.org. To learn how the Foundation can help you become a more effective giver, call 877-336-7575.