The stock market is having a rough year, but it is time to turn away from the 300 point swings for a moment and put things in perspective.
Through the first eight months of 2008, the broad stock market, as indicated by Vanguard’s total stock market fund (symbol VTSMX) is down 10.2%. Pundits and prognosticators alike are telling us how tough it is out there in the world of investing.
Sure, our economy is going through a rough stretch, caused in part by an increase in energy prices and the mortgage/housing debacle, just to name a few.
But, in light of the current market’s decline there is one topic that is rarely discussed by the pundits – it was due for a correction! From January, 2003 through October 2007, the stock market generated an annualized return of 15.54 percent. To put it bluntly, it would have been impossible for the market to have continued its torrid pace. Quite frankly, when you combine our current economic weakness along with its impressive performance during the recent years, I am somewhat surprised that the stock market hasn’t declined more.
It is never fun to have portfolios decline in value, but this recent sell-off is to be expected, if not welcomed. It is this very volatility and uncertainty that allows for the potential for higher long-term returns and why we invest in the stock market in the first place.
Even so, when the stock market languishes for an extended period of time, I have noticed that many investors tend to get a little antsy with their investments. It is not surprising that the Wall Street crowd starts creating newfangled products to assuage the fears and frustrations of investors. For instance, I have had many inquiries from folks across the nation wanting to know my thoughts about variable annuity investments that promise them participation in the stock market upside with limited downside risk. These annuities are usually pushed on to investors by aggressive salesmen who are looking for a hefty commission sale.
I found it interesting that not one person who inquired about these annuities fully understood the fees that were attached to the product, nor could they explain the investment parameters of the annuity involved. That doesn’t surprise me though, because the financial industry specializes in bringing to market extremely complex products with exorbitant fees attached, all pretending to help the investor through this rough stretch of investing.
Many are looking for an easy way to make money and get rich. A friend of mine, Rick Van Ness, whom I am collaborating with to bring The Coffeehouse Investor principles to college seniors, recently attended one of those mega-motivational seminars.
You have probably seen these seminars advertised in your local paper, consisting of six to ten fairly famous figures talking about different life-topics. I received an email back from Rick, and this was his report:
“One of their speakers talked about investing: how index funds would only earn 8% but their online newsletter would virtually assure 15% with its simple buy low sell high guidance, even when the stock is tanking. He got the Key Arena in a frenzy until it seemed like he had 10,000 believers that they could pick stocks and time the market better than institutional investors — because they were “nimble”. I was incredulous, but my heart sank when about 90% appeared to sign-up on the spot for his highly discounted training. It redoubles my belief that all of these people would be better off if they knew the facts. We have a purpose! There is a better way.”
In reflecting on his comments, I realize that we have a long way to go in highlighting The Coffeehouse message to investors across the nation, especially during market stretches like the current one. Our three principles are simple and straightforward. Take it upon yourself to introduce these principles to friends and family members who can benefit from them.