Tahoe Market Pulse: Don’t panic; history will be on your side
Most every day on CNBC’s Fast Money program the topic is whether it’s time to sell stocks. Elsewhere, investors see gloomy market forecasts from respected analysts like Larry Fink, head of BlackRock, and Jeffrey Gundlach, founder of Doubleline Capital.
Then there are the perma-bears who continually predict market crashes (yada, yada, yada). It makes it hard to stick with stocks.
For most investors, these are all distractions that can hurt portfolio performance. That’s why people who simply buy and hold low-cost equity ETFs usually do better than armchair traders.
A recent study from The Irrelevant Investor shows that investors have greatly underperformed the market averages because of panic selling.
That explains why the S&P 500 ETF (SPY) has grown at an annualized 18.08 percent since March 2009, but investors in the SPY earned only 11.02 percent. Over those 7.5 years, that’s a difference of a whopping 115 percent.
Investors should keep in mind that the longer the time horizon the more likely stocks will go up. For example, if you hold stocks for one day there is a 46 percent chance you’ll lose money (nearly a coin flip).
If you hold stocks for one year then there is a 27 percent chance. A three-year horizon brings a 17 percent chance of loss while a ten-year time horizon yields only a six percent chance of loss.
Holding for long periods is easier said than done. People panic out of stocks when their portfolios are too volatile because they only sell after prices fall.
They don’t panic when the rise too far. For that reason, it’s important to build a portfolio that has a level of risk that allows you to calmly ride the inevitable ups and downs.
As an adviser, this is the most important part of my job. To lower volatility, one can add a few high yielding fixed income instruments to the portfolio.
I like the Prospect Capital 6.25% Note (PBB), which is investment grade. I also like Countrywide Capital 7.00% Preferred ‘B’ (CFC.B) below $25.50.
Investors can also reduce downside volatility by holding established high dividend paying stocks. Consider AT&T (T), which yields 4.46%. Pfizer (PFE), Spectra Energy (SE), and General Electric (GE) also qualify.
When you hear bearish forecasts from the financial media keep in mind that they rarely say where to put your money after you sell. Sit in a money-market fund that pays next to nothing? I don’t think so. Stay put instead. History will be on your side.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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