Friday, January 11, 2008

Investing In A Volatile Market

It goes without saying, but the U.S. equity markets have experienced quite a bit of volatility as 2008 gets started. Most of this volatility has been on the downside too with the S&P 500 Index already down nearly 5% this year. An essential investor reaction in this kind of market should be to stick to the long term strategy that one is following. Certainly, if this type of market results in losing sleep at night, an investor should evaluate their overall investment program.

Janus recently discussed this topic in an article in the company's quarterly newsletter. The sub title to the article is "How to be an Unemotional Investor." Keeping ones emotion out of investment decisions generally leads to less volatile investment returns. The article cites three guidelines:
  • Stick with your strategy: Develop a personalized investment strategy and stick with it through market ups and downs. Remember that you invested in stocks to steadily build and preserve wealth over decades, not to try to jump in and out of the market on a whim.
  • Maintain a long-term perspective: What investors fear most is not market volatility, but losing money. Historically, however, investing over longer periods of time has actually reduced the risk of loss. In fact, while the market has suffered 23 losing years since 1926, there has never been a 15-year period when the stock market lost value. This record illustrates the importance of maintaining a long-term perspective, rather than panicking and redeeming your investment during market downturns.
  • Keep your emotions in check: Volatility is far from a recent phenomenon. Over the last 80 years (through December 2006), the S&P 500.® Index has produced annualized gains of 10.3%. That's an impressive display of long-term growth, but it doesn't mean that stocks rise 10% every year. In fact, in only six of the 80 years between 1927 and 2006 has the Index's return been within three percentage points of its long-term performance average (i.e., between 7.3% and 13.3%). So whether the market is in a nosedive or skyrocketing to new heights, let yourself be guided by reason and a sensible investment plan, not your emotions.
Dealing with Market Volatility
Janus Report
Winter 2007

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