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Stocks Are Rising - What Should I Do?After spending the first quarter in a free fall, the stock market appeared to rebound from the rock-bottom lows of March and entered a recovery mode during the second quarter. By mid May, the S&P 500 had reached its highest point since August 2002.1 And just when some pundits were saying the long-awaited, prolonged upswing had at last begun, the markets briefly pulled back with some consecutive negative gains.The average investor who has also pulled back over the past few years might be fairly puzzled by this kind of activity. Were you thinking, “Have I missed the rally?” or “Do I put new money in the market?”2 Learn from Yesterday, Not Tomorrow Trying to judge the future by day-to-day market activity can be frustrating and ineffective. For example, when the market fell from its May 15 high, many were calling it jitters from the weaker dollar; others said it was due to comments by the Federal Reserve chairman. By the time the market began to regain momentum, the dip was coming to be characterized as a “price correction.” It’s difficult to say who was right or wrong. The market is always going to do something that surprises. Your personal financial future is simply too important to rely on a strategy of trying to read tomorrow’s news in today’s headlines. In March 2003, when the S&P 500 had fallen to near 800, its lowest point since October 2002, investing in stocks might have seemed to the uninitiated as only slightly more appealing than setting money on fire.3 But those people who had already fled the market missed the sustained climb that followed. Neither those who had pulled back — nor those who had stayed in the market — had any idea that an upswing lay ahead, but only one group was able to benefit from it. Take the Long View A $10,000 investment made 20 years ago in stocks tracking the S&P 500 would have grown to $96,613 by April 30, 2003. During this 240-month period, there were 90 months in which the market sustained a loss.4 Would the $10,000 have grown to a larger sum if there had been fewer negative months? Probably. But would keeping the original $10,000 investment safe by avoiding those 90 down months be worth missing the $86,613 gain? Probably not. The real lesson is that trying to invest your money at the right times and pull out when times are tough is an unproven — and typically unsuccessful — approach. By sticking to a detailed financial strategy appropriate for your time horizon, personal goals, and risk tolerance, you may be less concerned with short-term moves and more focused on long-term potential. 1, 3) Yahoo! Finance, 2003. Performance described is for the period 8/26/2002 to 5/15/2003. Stocks are represented by the S&P 500 composite total return, which is generally considered representative of the U.S. stock market. The performance of an index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results. 2) The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. 4) Wiesenberger, 2003. Performance described is for the period 04/30/1983 to 04/30/2003. © 2002 Emerald Publications
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