If every dip felt like death, your heart belongs to insured certificates of deposit. Thousands of savers who switched into bond-owning mutual funds started switching back after losing as little as 2 percent and should never be tempted by funds again. No one invests successfully who can’t handle a year or two of nasty news. Better a low-growth investment you’ll keep than a “better” one you’ll flee at a loss.
But if last year’s disasters struck you as merely a market cycle, you’re a true investor who ought to be hunting up things to buy in ‘95.
The investment timers, who try to stay out declining markets, say (1) buy bond funds now, they’re close to their lows; (2) wait a while to buy stocks, they’ll drop further the next time the Federal Reserve nudges short-term interest rates up. But last year’s guru timers didn’t come close to getting you out of the way of the bond market’s collapse. And you can be sure they’ll be wrong again – you just don’t know when or in which direction.
What’s more, timing errors are surprisingly costly. For proof, I offer a timely new study of stock fluctuations by H. Nejat Seyhun, chairman of the finance department of the University of Michigan School of Business Administration. He analyzed a composite index of stocks on the New York and American exchanges and on NASDAQ, to see how good you’d have to be to turn market predictions into profits.
The odds are daunting. For example, take the 7,802 trading days from 1963 through 1993. If you were out of the market during the 90 best days – just 1.2 percent of the time – you’d have lost 95 percent of all the market’s gains. One dollar invested in 1963 would have grown to only $2.10 – less than you’d have earned by staying in one-month Treasury bills. By contrast, the investor who bought stocks and held them during those 31 years would have seen his dollar grow to $24.30.
Applying the same analysis to the 816 trading months of 1926 to 1993, Seyhun found that a buy-and-hold investor could have turned a dollar into $638.30. But of that gain, an astonishing 99 percent occurred during a mere 48 months scattered over the 68-year span. Had you missed only the single best month, your dollar would have grown to just $461.60 – 28 percent less. There’s no way to guess that lucky month. You have to be in the market already and catch fortune when it shines.
Wesley McCain of Towneley Capital Management, an investment-management firm in New York that financed the Seyhun study, says its findings also call dollar-cost averaging into question. Conventional wisdom says that lump sums of money should be invested over several months – which does lower risk. But by delaying, you might miss one of those magic moments when stocks spurt.
Being committed to buy-and-hold doesn’t mean you have no choices to make. You need to choose the mix of investments that suits the risk you’re able to take. Here’s the state of the markets in ‘95:
Metropolitan areas face another pricing hurdle. As more work is done by satellite, modem, e-mail and fax, people are dispursing into the countryside. More than 400 rural counties that lost population during the 1980s are growing again, Reed says.
As for dangerous surprises, Steven Leuthold of the Leuthold Group in Minneapolis has his eye on equity derivatives like customized options. Unwinding them could accelerate selling in the event of a market drop. In November, net cash flows into equity mutual funds slumped; wholesale selling could also drive the market down. The gurus say that stocks bought today will yield below-average returns, but maybe not the smaller stocks. They’ve been in a high-performance mode since 1990, and T. Rowe Price’s Jack LaPorte thinks the cycle still has several years to run.
What’s the chief danger to stocks, bonds and jobs? Tax cuts unsupported by credible cuts in federal spending. The Fed has a good shot at stretching out growth and employment for several years. But if Congress and the president run up the deficit again, causing interest rates to spike, cover your eyes and watch out below.
Investors who gambled on beating the market lost money last year. Suddenly, CDs looked good.
INVESTMENT 1993 RETURN One-year CD 3.1% Existing homes * Northeast -4.1 Midwest 1.3 South -1.1 West 3.3 Mutual Funds ** S&P Index funds 1.3 International -1.4 Small-company growth -1.9 Growth -2.3 U.S. Treasury funds -6.2 Utility funds -8.7 Emerging markets -11.1 Gold -12.7 * 12 Months ending November. ** Through Dec. 28, dividends reinvested.
