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Do something … if it works, do it some more

By Don Kuehn


There is no doubt that the past three years have been a trial for every sector of the economy, for every person who works for a living, and for school boards and government authorities trying to provide services under mounting stresses to their budgets. In what is widely accepted as the worst economic period since the Great Depression, why not turn for guidance to someone else who experienced tough times?

Franklin D. Roosevelt said, “In regard to every problem that arises, there are counselors who say ‘Do nothing’; other counselors who say, ‘Do everything.’ … I say to you: ‘Do something’; and when you have done something, if it works, do it some more; and if it does not work, then do something else.”

Consider what to do with the investments you have built up over the past few years. If you have been a consistent investor—through dollar-cost averaging—in a balanced portfolio of mutual funds, you have seen two things: As the price per share of your favorite funds has gone down, the number of shares you have bought each month has increased; and unfortunately, the balance of your portfolio has probably dropped a little bit.

As of the middle of July, all categories of funds (balanced, U.S. stock, international) are up just under 1 percent (year to date). Small cap funds are the exception to the rule, rising more than 4 percent.

From mid-2009 to mid-2010, it’s a different story: The 3,729 balanced funds are up an average of 18.81 percent; over 9,500 U.S. stock funds are up an average 26.08 percent; and all stock funds are up more than 21 percent. The group average of all 5,768 bond funds is up 11.71 percent (all figures according to Morningstar).

The three-year results are not as rosy. Although there were winners within each category, the annualized averages for balanced and U.S. stock funds are down 3.75 percent and 8.54 percent respectively. Bond funds, on the other hand, were up 4.69 percent per year for the three years.

So, it’s a matter of finding the right vehicle for your money. If you took the basic route and put your cash in an S&P 500 Index fund, you’d be up 14.33 percent for the year but down 9.84 percent per year over the past three years. If you invested in a total bond fund, however, the one-year return was 9.41 percent and the three-year annualized return was up 7.64 percent.

If you look just at average returns, you might be tempted to load up on bond funds and wait for the turmoil in equities (stocks) to be resolved. But all indications are that interest rates are going to start creeping up, and it’s interest rates that drive bond returns. As interest rates go up, bond prices go down.

It is important to maintain your focus. Even though recent results have not been as good as some periods in the past, it takes discipline to keep investing regularly and building the number of shares in your portfolio. Remember, the idea is to buy low and sell high. Dips and “pull-backs” are great buying opportunities if you believe the markets will snap back within a reasonable time

As FDR said: Do something. If the balance between stock and bond funds in your portfolio is not producing the results you want, do something else. But don’t stop putting money aside every month.

Normal savings accounts are showing a yield of under one-quarter of 1 percent. You can’t build a nest egg on returns like that.

The key in this environment—and in any market, for that matter—is to match your tolerance for risk with your time horizon. How long will your money be in the market before you need it to fund college or retirement? The longer your money will be invested, the more risk you can take and the better off you will be when the markets shift in your favor.

No one knows when the markets are going to bounce back after a recession or a correction. Usually these things sneak up on you so slowly that it’s easy to miss the shift. So if you bail out of your holdings and go to cash or money market funds to avoid the near-term discomfort, chances are you’ll miss out on the best months of performance.

For a little historical perspective, consider that since 1926, the S&P 500 Index has had 59 positive years and only 24 negative years. During that same time, 46 years have produced returns in excess of 10 percent. Now, if only you could anticipate which years would produce the good results, you’d be rich beyond your expectations. But you can’t. So why let a few bad years keep you from capitalizing on the good ones?

Morningstar did a study of the returns from the S&P 500 Index from Jan. 1, 1959, to Dec. 31, 2008. If fully invested in all months during the period, the average annual returns were 9.19 percent. But if you missed the best 10 months out of that 30-year period your return would be only 6.7 percent; miss the best 20 months and you’re down to 4.92 percent; miss the best 40 months and you’re down to 2.04 percent.

Trying to “time the market,” i.e., guess when stocks are going to turn around and go higher (or lower) is a fool’s game. You can’t win.

Bottom line: No one knows if “it’s different this time,” but assuming that past is prologue, and that we’re going to see the effects of the stimulus program, the repair of the credit system, the newly passed financial reform program and the gradual rebuilding of the economy take hold, there traditionally has been no better place to put your money than in a well thought-out plan that mixes low-cost, no-load mutual funds that invest in bonds and stocks.

It’s your money, and even though you can’t outguess the market, you can take advantage of dips in prices to buy more shares of your favorite funds and build your portfolio for the future.

Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to