Commentary for the week ending February 5, 2010
Long-term vs. short-term
or
Patience and persistence vs. emotions and reaction
Do emotions affect our investment decisions? Yes! Ironically, we react differently to declining stock prices as compared to declining home values.
Almost everyone’s home has decreased in value over the last two years. However, we don’t receive monthly statements showing the decreased value. Also, it can be a cumbersome process to list our home, eventually sell it, and move, versus simply making a phone call or placing sell orders online. Most importantly, I’ve heard many clients state, “I would be crazy to sell my house in this environment.”
This same thought process may not transfer over to our investments. It is much easier to exert what we consider “control” in an emotional period by moving all or some of our investments to cash. It gives us sense of relief in the short-term and very little effort is needed when compared to the sale of a house.
The following illustration shows exactly how most of us react in Bull (up) and Bear (down) markets.
Unfortunately, the bear markets following the dot.com bubble of the late 90’s and the recent housing bubble inflicted fear, and for many, investment losses.
Instead of focusing on what occurred just recently or in each of these separate market events, I want to illustrate a long-term perspective. As such, I took the top 15 holdings (excluding money market funds) for IIA clients as of 1/31/2010. This is a mix of income, bond, balanced, U.S. and international stock funds. The combined value of these holdings represents over 72% of all assets under IIA’s management (i.e. our clients’ mutual funds.)
I went back approximately 15 years to 12/31/1994 and invested $10,000 into each of these funds. It should be noted that 5 of the top 15 funds did not exist then, so for them I went back to their inception date. Then I ran the following scenarios using information provided by Morningstar and not deducting any advisor or discount brokerage fees for purchases or sales. The investment mix used in these illustrations is not representative of any client portfolio and past returns are no guarantee of future results.
Scenario 1)
- Invested $10,000 into each of the funds on 12/31/1994 or the fund’s inception date for those funds that didn’t exist at that time. All dividends and capital gains were reinvested.
- Under this scenario, the portfolio earned 11.42% per year for the period 12/31/1994 through 1/31/2010.
Scenario 2)
- Invested $10,000 into each of the funds on 12/31/1994 or the fund’s inception date for those funds that didn’t exist at that time. All dividends and capital gains were reinvested.
- All shares were sold at the bottom of each of the previously mentioned bear markets (i.e., low for the S&P 500) and moved to cash.
- Then the cash was reinvested equally amongst the 15 funds one year later.
- Under this scenario, the portfolio earned 6.85% per year for the period 12/31/1994 through 1/31/2010.
The above scenarios involved the same funds and time periods. The only difference was patience, persistence and continuing a long-term investment strategy versus letting fear drive your choices and selling near market bottoms; then letting greed drive your choices and buying back a year later.
I realize it is much harder to remain steadfast and committed to one’s investment plan in the face of what appears to be a run-away decline in your portfolio. I am using the above illustration to make the point that there will be future bull and bear markets and emotions will rise and fall with them. However, we need to use history as our guide. We have what I believe is a solid mix of investments with proven long-term track records. That being the case, then all that is necessary is for us to stay focused and not give in to greed or fear is to stay the course.
IRA Required Minimum Distributions (RMD) for those over age 70 ½
Some clients are required to take distributions from their IRA each year. In 2009, the IRS waived this requirement; however, it is back in play for this year. As such, TD Ameritrade provides us a list of all clients who must take a withdrawal from their IRA and the minimum amount required to avoid any penalties.
We review all client accounts (who are required to take a RMD) and verify that they satisfy the requirements. Sally Gradinjan will contact only those clients (via phone or e-mail) who need to withdrawal additional funds to meet this requirement. If you do not hear from Sally, then it means that you are in compliance and not action is necessary on your part.
Please note, we cannot provide this verification process for any IRAs not held at TD Ameritrade. If you have other IRAs outside of TD Ameritrade, please contact that custodian for assistance. Feel free to contact the office if you have any questions on this subject.
Quotes
“When we put ourselves in the other person’s place, we’re less likely to want to put him in his place.”
Farmer’s Digest
“Everyone only goes around the track once in life, and if you don’t enjoy that trip, it’s pretty pathetic.”
Gary Rogers, author
“Frustration is your worst enemy. You have to continue to stop yourself from letting it drive you to make irrational decisions.”
Henry R. Kravis, American business financier
“You’re not rewarded for having brains. You’re rewarded for using them.”
Mordecai Johnson, clergyman and educator
Tony Moeller, President
Integrity Investment Advisors
12721 Metcalf, #202
Overland Park, KS 66213
tmoeller@iia-kc.com
913-897-2074
The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.
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