This may sound crazy, but it’s refreshing to see stock prices take a break. When prices keep advancing, some investors develop unrealistic expectations. I have met a number of investors that after the last 3 years (the S&P average advanced 37, 25 and 33 percent respectively in 1995, 1996 and 1997), believe that it’s normal to make 20 percent or more each year in stocks. I even met a retiree that has all of his money in stock mutual funds and is dependent on the annual return for his income. I shudder to think how he will do if the market declines 3 years in a row! When investors get overly bullish, they forget to protect their capital and expose too much money to risks they may not be prepared for.
Here’s how to tell if your balance is right. Have you felt uncomfortable or nervous about your portfolio during this recent decline? If so, you have too much in the market. Your money should be invested so that in years when the market dives 20 percent (and 1998 could be one of them), you do not panic and can continue comfortably with your investment strategy.
Such dives are more frequent than you may remember, as this table shows:
Major Market Bottoms |
DJIA Decline # of Days % Loss |
|
1980 |
30 |
-20.6% |
1982 |
311 |
-24.8% |
1984 |
164 |
-16.8% |
1987 |
38 |
-38.9% |
1990 |
61 |
-22.5% |
1997 |
88 |
-13.2% |
Source: Prudential Securities and Metastock
So if you have money in the stock market, you must be prepared for those years with 20% to 30% declines. As you may be familiar, we have managed our clients’ money with a system designed to minimize these declines. If you desire a low risk strategy (the Dow Dividend System appreciated 3% while the S&P 500 dropped 41% in 1973/1974) and a system which has delivered significant profits (outperformed the S&P 500 index by an average 40% annually for the 25 years ending December 31, 1997), then check off on the coupon for a free report on a system that may calm your nerves and improve your net worth.