Time-Tested Investment Principles from the BTC Wealth Management Group
When financial markets are in turmoil it is important to maintain a sound and disciplined approach to equity investing. We believe the following principles remind long-term equity investors of the benefits of staying the investment course by remaining invested in equities. For those investors whose long-term investment objectives, time horizons and risk tolerance dictate portfolio allocations to equities, we reiterate the following time-tested principles: 1. It is not when you invest in equities, but if you invest: While no one can predict which specific investments will perform well, we believe investors should be aware of how financial and other world events impact stock market performance, investor confidence and ultimately, investment returns. Please consider the following three investment scenarios for the 20-year time period from 1987 to 2007; an investment of $5,000 on the: - “best day” to invest each year (when stock prices were at their lowest) - “worst day” to invest each year (when stock prices were at their highest) - “risk-free” investing in cash equivalents on the last day of each year
Initial Investment $5,000
$400000
$300000
$299,503 $237,602
$200000
$161,842
$100000
$0 1987 1989 99 1 993 1995 97 1999 2001 2003 2005 2007
Equities – Best Day Investing $5,000 in Equities on the “Best Day” Each Year – When Stock Prices Were Lowest Worst Day Investing $5,000 in Equities on the “Worst Day” Each Year – When Stock Prices Were Highest Cash Investing $5,000 in Cash on December 31 of Each Year
Line Chart Source: Bloomberg. Assumes all dividends were reinvested and there were no fees or sales charges. Past performance is not indicative of future results. The equity investment is represented by the values of the S&P 500 Index over the 20-year period, with purchases made on days with highest and lowest values respectively, and plotted based on December 31 values of each year. The cash investment is represented by 3-month U.S. Treasury bills. Source: Morningstar. Unlike investments in stocks, investments in Treasury bills are backed by the full faith and credit of the U.S. government, and if held to maturity, offer a fixed rate of return and fixed principal value. The S&P 500 Index is the Standard & Poor’s 500 Composite Index of 500 stocks, an unmanaged index of common stock prices. The Index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.
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2. It’s time in the market, not “timing” the market: If stocks are a viable component of your asset allocation, it’s critical that you be patient and remain committed to your asset allocation decision (and thus stocks).Attempting to time the market (to avoid potential downturns) may actually preclude you from participating in subsequent recoveries. The following chart reflects how missing just a very few days in the market can dramatically impact returns:
Average Annual Total Returns of the S&P 500 Index 1987-2007
11.50% 7.96%
1.30%
-3.63%
Invested All 5,296 Days
Minus 10 Best Days
Minus 40 Best Days
Minus 70 Best Days
Source: Goldman Sachs Asset Management. Calculation is based on 5,296 days, excluding weekends and holidays.
3. Maintain an appropriate perspective based on your investment horizon: Historically, time has mitigated risk. Consider the following:
The Percentage of Time Stocks Posted a Positive Return over Rolling Time Periods From 1987-2007
81%
1-Year Periods
90%
5-Year Periods
100%
10-Year Periods
100%
15-Year Periods
Source: Goldman Sachs Asset Management. The returns for Time Tested Principles 2 and 3 are based on the S&P 500 Index. The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The Index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. Past performance is not indicative of future results.
Investment Management Services
A Division of Bankers Trust Company