What Have We Learned from the Market's Wild Ride?

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In dizzying succession, the past few years have brought investors the steepest stock market decline since World War II and one of the fastest stock market surges.* Many investors feel that they were unprepared to deal with the gyrations. Learning from the experience may lead some to a calmer outlook for the future.

  1. Find opportunity in adversity. When the value of your portfolio drops as far as many did in 2008, it can send a shudder down your spine. But you can take a deep breath and then remind yourself that drops in the market may create an opportunity to buy low.
  2. Keep a long-term perspective. Stock market results in 2008 were miserable. The S&P 500, a broad measure of the U.S. stock market, was down 37.0% in 2008. That's enough to give anyone pause. But if you have a long timeline until retirement, you may have time to ride out market cycles. Since 1926, there have been 75 overlapping (rolling) 10-year periods, 71 of which had positive returns.**
  3. Asset allocation matters. In 2008, when stocks were having a very bad year, long-term corporate bonds earned 8.8% and long-term government bonds returned 25.9%. And in 2009, when stocks were soaring, bonds didn't do as well, returning 3.0% and -14.9%, respectively.** As is often the case, different asset classes – stocks, bonds and cash equivalents – reacted to market conditions in different ways. By dividing your investments among the three major asset classes, you can help to manage risk while pursuing attractive returns. The asset allocation you choose should be based on your goals, timeline and risk tolerance.
  4. Stay the course. With systematic investing, also called dollar-cost averaging, you invest a consistent amount of money at regular intervals, no matter what the market does.*** It can take the emotion out of investing and replace it with a measure of discipline. Since you buy more shares when prices are lower and fewer when they're higher priced, over time, the average price you've paid for the shares you own may be lower than the average share price. If you kept investing during the recent downturn, you bought more shares with the same dollar amount, and then had more shares on which to enjoy the turnaround in prices. When you make regular contributions through payroll reduction to your 403(b) or 457 plan, you are practicing systematic investing.
  5. Consider professional guidance. If you have neither the time nor expertise to manage your own 403(b) or 457 portfolio, consider meeting with a reputable financial advisor.

* Past performance is not an indication of future results.
** Source: "Ibbotson® Stocks, Bonds, Bills, and Inflation ® (SBBI®) 2010 Classic Yearbook" from Morningstar®. Past performance is not a guarantee of future results.
*** Systematic investing cannot guarantee a profit or protect against loss in a declining market. Consider your ability to continue investing through periods of low price levels.