Market Commentary
Some Perspective...
Fact – Through 10/19/11 the S&P 500 with dividends (a proxy for the performance of large U.S. stocks) is down 0.99% year to date. It was up 15.06% in 2010 and up 26.46% in 2009.
Fact – Through 10/19/11 the Barclays Capital U.S. Aggregate Bond (a proxy for the performance of U.S. bonds) is up 6.13% year to date. It was up 6.54% in 2010 and up 5.93% in 2009.
Fact - according to Yahoo Finance as of 10/19/11 the average money market fund in the U.S. Is earning 0.54%. The average one year bank CD is earning 0.78%. The average three year bank CD is earning 1.11%.
Fact - In 2011 the stock and bond markets of the world have been more volatile than just about any time in history. This sure makes it difficult to maintain a positive attitude and faith in the future.
Volatility is the down AND up movement of the price of a security. If your stock mutual fund goes down in value by 5%, it does not mean that 5% of the companies you own went out of business. It means that the combined value of all of your companies is temporarily down 5%. Please note the word "temporarily" in the previous sentence. No, we cannot guarantee that downward movements in the value of your portfolio will rebound, nor can we guarantee that the sun will come up tomorrow. However a whole lot of history suggests it's okay to feel good about the future of your investments. And personally, I am making some plans for tomorrow.
Default does equal loss. If you own one stock or bond and the company goes out of business, you have a loss. You just about make default risk go away if you own many stocks or bonds. You actually own hundreds if not thousands of stocks and or bonds in your portfolio.
As trite as it may sound, if you invest in stocks or bonds you are investing in capitalism. Most of our planet embraces capitalism, which has brought us the quality of life that we enjoy today versus the Stone Age. Capitalism does not work perfectly. Sometimes greedy people and/or dumb governments mess it up. When that occurs, it takes some time to work out the problems. The alternative to NOT working out those problems is unthinkable.
Please don't pay any attention to the financial news of the day. It will make you crazy. The media lusts for bad news and goes out of its way to sensationalize things. Get a hobby. Read a book. Play with the grandkids.
It's difficult, but try not to get emotional about your money. If you do, you will probably make poor financial decisions.
If you are young or middle age, you have plenty of time for the world to get better. And right now we are having a sale on investments! You should be excited.
If you are in or near retirement, you have an appropriate investment strategy. That does not mean it does not go down in value once in a while.
If you have some money, it is probably a very good time to invest it. I can think of several clients who have just come into a chunk of money that was supposed to be invested, but they are waiting for things to get better before doing so. What that usually means is that when they are finally comfortable investing this money, they will purchase investments at significantly higher prices than now. Buying investments after they move higher, or selling them after they move lower is not good. Warren Buffet once said that the stock market is a very efficient mechanism for transferring wealth from the impatient to the patient. John Templeton often said to buy at the moment of maximum pessimism and sell at the moment of maximum optimism.
Your best hope for a successful retirement is to have a comprehensive financial plan in place. Update it regularly and stick with it. We have three Certified Financial Planners at McNamara Financial Services.
Your money and what it earns is an important part of a retirement plan, but probably not the most important part. Living within your means, saving enough money, and having no debt in retirement are usually much more important parts of a successful retirement. These things you can control. We hope that you are doing a good job.
Just about everybody we know is sitting tight with their investment strategy and waiting for the world to get better. Optimism and patience are in short supply these days. So congratulations for hanging in there.
Michael J. McNamara, CFP® Justin J. McNamara, CFP® Alyssa McNamara Reed, CFP®
