Reports of the death of stocks and equity mutual funds have been greatly exaggerated.
While a vocal minority is predicting the end of modern portfolio theory and retirement savings plans as we know them, most investors seem to be waiting for the storm to pass and prefer to listen to the steady, reassuring words of financial leaders who continue to preach the fundamental, tried-and-true principles of investing, even as the Dow Jones Industrial Average tumbled last Monday to a 12-year low of 7,114, a figure not last seen since Oct. 28, 1997.
Invest for the long term. Buy low, sell high. Selling at the bottom means locking in losses. Past performance does not guarantee future results.
"There is tremendous uncertainty and a lack of confidence in the markets right now," said Todd Morgan, chairman and CEO of Los Angeles-based Bel Air Investment Advisors. "People don't want to be pushed to do anything. Even though they might miss a great buying opportunity, it's important to be sensitive. Nobody can pick a bottom."
It's tough to be an optimist when the bad news keeps rolling in, and it's hard to convince people to wait out the storm when it's been raining for weeks.
"Our message hasn't changed significantly since the crisis began," said Rebecca Cohen, a spokesperson for The Vanguard Group. "There is a real desire from our clients to hear from the thought leaders at Vanguard. The web has really become a great venue for communicating with clients. These days, 80% of our clients interact with us via the web."
Vanguard's website last week reminded investors that investing is about the future, not the past.
"Whether you're 22 or 62, you're a long-term investor," said Vanguard Chairman John Brennan in a message to investors. "We don't invest to retirement. We invest through retirement. Stocks can go through weak patches, sometimes lasting a decade or more. But financial theory and the empirical evidence suggest that they're our best chance at long-term growth. In the long run, stock returns are likely to revert to historical averages."
Fidelity Investments also has a robust educational section on its website, suggesting that investors build an investment plan, review their plan, check their portfolio and try not to let emotions affect investment decisions.
In a letter to shareholders, Fidelity Chairman Edward "Ned" Johnson III said Fidelity's equity fund performance last year "was not where it should be, and steps are being taken to bring improvement. Among them is the creation of small groups of more closely focused analysts and managers."
Fidelity saw its revenue fall 3.7% to $12.9 billion in 2008 and its operating income fall 18% to $2.36 billion.
Johnson said Fidelity fared better than many of its competitors, emerging from 2008 "a little bruised, but strong and confident about the future for ourselves and our customers."
Confidence in a New World
Fund companies are seeing web traffic increase dramatically, and the more information and educational videos they can put online, the better they believe they will be able to communicate with investors.
In December, visits to MassMutual's website were up 270% from a year earlier, and call center volume rose in October by 29% from the previous year, the company said.
"Everyone wants to know what to do and how to get back in," said Carey Foran Hoch, senior vice president and head of marketing at John Hancock Funds. "Clients are seeking help from their advisers."
While John Hancock doesn't work directly with investors, Hoch said advisers and wholesalers are doing everything they can to help their clients.
"Last June, we launched an answers brochure with answers to eight common questions," she said. "We saw it fly off the shelf. It was the single most used piece we offered. Best of all, it was client approved."
Hoch said Hancock's new theme is creating confidence in the new world. Its new brochure focuses on recovery and is titled, "Where Do We Go From Here? A Plan to Navigate Recovery."
"Our recovery brochure is just going to press now," she said. "The whole kit is focused on job losses, how to take care of your 401(k) and the next steps to take. A lot of firms and advisers are interested in this information. Usage alone tells us they need it and are using it, and wholesalers have told us it makes their job more impactful.
"If the stuff we have is working, the feedback is usually incredible," she continued. "It helps differentiate our wholesalers and helps our advisers to have a better product. Ultimately, the benefactor is the client."
Market analysts and portfolio managers seem to be in agreement that prices are at historic lows, and quality stocks and bonds are selling at prices too good to pass up.
"This is a great opportunity to start investing," Morgan said. "Right now, all our new business is in bonds, which is probably wrong. People are steering themselves toward high-quality bonds, but this might be a good time to be a contrarian."
Buy-and-hold isn't sensible when the market changes direction so sharply. Investors may need to rebalance their portfolios periodically to account for market changes so they don't lose 50% of their savings when the market drops by 50%.
"Rebalancing involves regularly trimming winners in favor of laggards," said Morningstar Analyst Christopher Davis. "That's a prudent investing strategy because it keeps a portfolio diversified and reduces risk. But rebalancing too frequently could limit your upside. Instead, rebalance only when your portfolio is out of whack with your target allocations."
"Asset allocation is the most important thing," Morgan said. "I ask people to remember what they felt like when the market was twice as high. Would you rather buy on sale or when it's fully priced?"
Managers can tell investors to go against their gut feelings and start buying risky stocks, but nobody knows how far the markets will fall before they hit bottom.
"I tell people to 'sell 'till you sleep well,'" Morgan said. "In the end, the market will do everything it can do to prove the most people wrong."
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