Tips for the Market Savvy Physician

Written by on December 5, 2011 in Practice tips - No comments

By Jennifer Daknis

No matter how many market “corrections,” or sharp declines you see, they are never easy.  Occasionally, and we’ll venture to say this summer’s decline will be viewed in the future as one of those times, corrections take on a life of their own and morph into a full blown panic.

“Panics,” if we may coin the term, are far from fun for investors. They are also far from rational.  They represent the point at which people will sell all their investments, at any price. The operative word being “any.”  Panics come up every now and again for various reasons, without much consistency, rhyme or reason as to why. They just happen. There is no value a panicked investor won’t take for their investments.  Panicked investors lose.

The best protection against panic is an asset allocation suited to your goals, tolerance for risk, and time horizon.  That being said, whether you have a little or a lot invested in the greatest companies in this country and the world, it is easy to forget what is normal fluctuation for stock investments.  Just understanding this concept might lend comfort when the next panic attack occurs.

Please note the chart below which shows the S&P 500 (without dividends) from 1980 to 2010 indicated by the bars and numbers directly above them. For example, in 2010 the S&P 500 gained 13 percent (15.1 percent including dividends). What’s interesting here is the number by the dot below.  If you looked at your stock accounts daily (which I don’t recommend because it will drive you crazy), the lower number by the dot indicates the amount of decline you experienced, or had to suffer through, at some point during that year.

So using 2010 as an example again, you experienced a decline of 16 percent (from April 23 to July 5) even though your full year gain was 13 percent (again, 15.1 percent including dividends).  The numbers were even more extreme in 2009. You had to suffer through a decline of 28 percent during the first part of that year, but if you were able to hang in there, your annual gain was 23 percent.

In fact, the average annual decline of 14.3 percent over the past 31 years makes the 2011 “peak to trough” decline of 17 percent at the time of this writing almost average.

Interesting note: The S&P 500 finished in positive territory in 24 of those 31 years in spite of an average 14.3 percent annual decline.

Of course, the past doesn’t necessarily equal the future and past performance can’t guarantee future results, but then again, nothing guarantees future results. We just wouldn’t bet against it.

Securities offered through LPL Financial, Member FINRA/SIPC. This article is not intended to provide specific investment advice. Stephen E. Sigmon and Jennifer B. Daknis are financial advisors with Sigmon Daknis Wealth Management, with securities offered through LPL Financial.  Sigmon Daknis Wealth Management serves both individual and corporate clients. They can be reached via phone at 757.223.5902 (Newport News office) or 757.258.1063 (Williamsburg office).

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