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Plan Well, Retire Well

Saving and investing your money

Sticking with Your Investment Strategy in a Difficult Market


It's the middle of July, so by now everyone, even those who receive their investment performance information in the mail, has had a chance to look at the state of their fund holdings as of the middle of 2008.

For most of us the news isn't good or pleasant. Many people with significant equity holdings in their funds have seen the value of their mutual fund holdings drop in the range of 10 to 20 percent since January 1, 2008. Count yourself lucky if your losses in equities are much less than 10 percent in this time period.

With these losses staring us in the face, what should the average small investor who is saving and investing for retirement do at this time? Should he or she change strategy and move funds from equities to cash or bonds at this time?

I argue that this is the time when the average small investor should stick to his or her plan (assuming that you have a long-run investment strategy) and not try to time the market, particularly now. I say this for several reasons.

First, if you have a long-run dollar-cost averaging approach to investing for retirement and now you change to a market timing strategy, you may have picked the worse time to come out of equities and move into cash. Small investors often follow and lag the market in its movements and pay a corresponding penalty for being laggards in timing. While the market may come down some additional amount, it might also begin to pick up and increase in value. There is a risk at this point of not being involved in the market, in that you may miss out on future appreciation of equities.

Secondly, the middle of a market correction or the beginning of a recession is a poor time to change one's basic approach to investing. One important purpose of an investment strategy is to guide even in the face of adverse market developments. The reason this is important is that fear and psychological biases have historically affected small investors (both in bull and bear markets) and led some to make poorly timed reallocation decisions.

Thirdly, if you are feeling prompted to change your investment approach because of losses you have suffered (or, alternatively, market gains you feel you are missing out on), be sure that your investment behaviors and knowledge about investing match up with the approach you are taking. If you are considering more active timing of your fund purchases or allocations, are you following the financial press at a detailed level and do you have market valuation ratios or statistics that you follow?

The losses in equities over the first two quarters of 2008 really bring home the question of investment approach and personal philosophy of investing for all of us who are small-time investors for our savings and retirement funds. Do you have an investment approach? Can you write it down and describe it? Is it robust (by this I mean, is it able to survive and withstand market ups and downs) to market swings and shocks?



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