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Antidote For Stock Market Volatility Is Major Topic At Investment Forum
CHAUTAUQUA, NY —As I walked down the steps into the old fashioned, wooden, open- air, amphitheatre on the grounds of the Chautauqua Institution here, it seemed an unlikely place for a scholarly discussion about the financial health of the major markets and their relationship to the U.S. economy. Both literally and figuratively, this setting on the edge of tranquil Lake Chautauqua, was worlds apart from the glitz and frenzy of Wall Street. It proved, however, to be an ideal venue for an unhurried and thoughtful discussion about current market gyrations, along with a sharing of new investment ideas and information with several of the nation’s top experts in economics, business, and the stock markets. The subject of market volatility — and how to deal with it — was on the minds of many of us in attendance. A seemingly sound recommendation for dealing with market volatility came from Richard Bernstein, chief U.S. strategist and chief global securities quantitative strategist for Merrill Lynch. His advice was simple and straightforward: “extend your time horizons.” Reducing risk Time is an investor’s best risk-reduction tool, said Bernstein. His research concludes that the chance of losing money in the stock market decreases rapidly with time. For example: • Investing in the market for only one day would give you a 46% probability of losing money.
Why is this information important? Because most investors typically earn much, much less than average market returns because their emotions often cause them to jump in and out of their investment holdings. Studies by Dalbar Inc., a Boston-based financial services research firm, show that the average investor earned only 3.9% annually over the last 20 years (1986-2005), while the S&P 500 returned 11.9%. Bond investors fared even worse. Why? Investor impatience The main culprit is “bad behavior” by investors. The emotional factors of “fear” and “greed” cause many investors to become impatient. They jump into “hot” market sectors at the top, exit underperforming sectors at the bottom, and overestimate their tolerance for risk. Others sell after market declines, and buy after a market resurgence.
The lesson here is to learn patience. Time is on your side, so extend your time horizon. Then stick to the fundamentals: • quality This methodology can allow you to invest for the long run — and reap the rewards that many investors miss. • • • If your portfolio hasn’t met your performance expectations, let Al Meszaros implement a disciplined strategy that can position your holdings for attractive long-term growth. He can be reached at (216) 830-1133 or elm@mimllc.com
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