Invest for the Long Term

Trying to outguess the stock and bond markets by frequently shifting money between types of asset classes (e.g. stocks to cash, bonds to stocks) is very difficult, even for seasoned professionals using sophisticated techniques.

Stocks represented by the S&P 500 Index. Past performance is no guarantee of future results. Source: Ibbotson Associates, Chicago. Used with permission. All rights reserved.

Attempts to time the market probably won’t help you very much since securities markets are unpredictable and often move in short, powerful bursts. Since it is so hard to predict when the market will go down and also when it is going to go back up again, many investors that try to time the market end up selling low and rebuying high. This is the number one behavior that diminishes investor returns over the long term. It is better to be patient, recognizing that short-term market changes are far less important than long-term trends.

The two-year period during 1973-74 provides a good illustration of the benefits of patience. During this period, the market, as measured by the Standard & Poor’s 500 Stock Index, fell 37%. But selling then would have been a mistake. Despite the steep decline during this bear market, staying with a $1,000 investment in stocks made in 1973 resulted in a $26,827 “harvest” at the end of 2001. Those who sold out at the bottom of the market and invested in safer Treasury bills would have earned only $6,652.

As you develop your retirement plan, remember to stay the course, and invest for the long term.