The past year has provided challenges and opportunities to U.S. citizens as consumers, investors, workers, and families. Below are ten lessons that can be learned from recent events:
The financial markets are resilient--Consistent with other disastrous events in U.S. history (e.g., Kennedy assassination and Pearl Harbor), major market losses occurred immediately following the September 11 terrorist attacks. While this was a frightening time for investors, it was also a time to "hang tough" and continue to buy securities when it appeared that the rest of the world was selling out. Eventually the financial markets rebound and some of the biggest gains follow the largest losses. For example, the S & P 500 stock index rose 37.2% in 1975 after the recession of 1973-74.
People are resilient--This was demonstrated by many WTC victim survivors. Resilience to handle unexpected events is increased by developing various "coping resources" including an emergency fund of 3 to 6 months expenses; job skills; adequate health and life insurance; organized financial records; community services; and good relationships with neighbors, family, and friends.
Market timing is futile--It is impossible to consistently guess the highs and lows of the stock market so don't even try. Instead, keep investing regular amounts in both bull (up) and bear (down) markets. You need to be in the stock market over long time periods to reap its rewards.
Uncertainty "comes with the territory"--You can't invest, particularly in stocks, with a "CD mentality." In other words, investors must expect to lose principal sometimes or to see a loss or reduction in earnings. Investments are inherently volatile and unpredictable in the short-term.
A loss is a loss only if you sell--A "paper loss," such as a declining mutual fund account balance on quarterly statements, is a temporary thing. An account's value will continue to change with market conditions. If you panic and sell during a downturn, however, you've lost real money.
Portfolio rebalancing today means buying stock--During the late 1990s, investors probably had to sell stock to keep their asset allocation percentages in line. That's because rising stock prices over-weighted this asset class. Today, it's just the reverse. Investors may need to buy more stock to keep the stock portion of their portfolio at its previous level.
Dollar-cost averaging takes the emotion out of investing--If investments are made regularly on an automated basis (e.g., bi-weekly 401(k) plan deposits), shares are bought during good times and bad. Otherwise, many people would not have the courage to invest during market downturns.
Bear markets are a true test of risk tolerance--It is easy to be an aggressive investor when stock indices are up 20% like they were during 1995-99. The last 18 months have been a true test of investors' sensitivity to loss. It is important to "follow your gut." Don't panic and sell, however. Instead, you might want to gradually reduce the stock portion of your portfolio.
Take care of estate planning basics--Life is precious and can be cut short tragically and unexpectedly. Don't make things worse for your survivors. Prepare a will and living will and purchase adequate life and disability insurance. Don't rely solely on employer benefits.
Employer matching cushions retirement plan losses--A 50-cent match for every dollar invested in a 401(k) plan is a 50% return on your money. It's like you're playing with the "house's money" in a casino. You need to lose a lot before you start losing your own money. Try to invest the amount needed (e.g., 6% of pay) to earn the maximum match from your employer.