Standing Firm In Times of Turmoil

Most of the time, being a long-term investor is not such a difficult task. The stock market bumps along day-to-day, sometimes higher and sometimes lower, but the overall trend is decidedly upward. Investors who are patient and don't move their money in and out of the market are rewarded with steady gains in their portfolios. It is easy to think this is what "discipline" is all about when it comes to investing.

It's not.

This - the current turmoil sweeping the markets - is what disciplined investing is all about. It is in times such as these, when the system seems to have gone hopelessly awry and the stock market is on the lips of everyone from the President to the checkout clerk at the grocery store, that investors truly earn their stripes. They are what we refer to as the "blink moments" - the times when millions of investors throw in the towel and head for the exits, dooming their financial future in the process.

No doubt it is tempting to blink when we turn on the TV and hear all the talk about the "unprecedented" nature of the current crisis. And it is true that big changes are a-foot on Wall Street, as the major independent investment banks fade away thanks to their imprudent actions and the major retail banks move to the forefront of the New World Order in the financial system.

This is not, however, to say this is a bad thing for the system. As an article in The Wall Street Journal put it today, "The days of banks running with leverage at 30 or 40 to 1 are over. The companies that took those risks have either failed or been absorbed by others." The ultimate result of this is that our financial system will become stronger and more stable, however bumpy the ride may be along the way.

It is also important to remember that shocks to the financial system are always unprecedented - that, after all, is what makes them shocks. It was unprecedented when terrorists slammed planes into the World Trade Center in 2001. It was unprecedented when the Arab nations cut off our oil supply in 1974. It was unprecedented when Japan bombed Pearl Harbor in 1941. That is the nature of historical events.

Lost in all of this is the fact that, over the past ten years, a well-diversified, all-stock portfolio has fared quite well despite the fact that the stock market experienced two major bear markets (2000-02 and the one we are currently in). Consider the following hypothetical index portfolio:

§ 40% Large Cap U.S. Stock
§ 15% Mid-cap US Stock
§ 15% Small Cap US Stock
§ 14% Large Cap International Stock 
§ 10% US REIT Stock
§ 6% Small Cap Foreign Stock 

For the 10-year-period ending 9/1/08, that portfolio enjoyed an annual gain of 7.73%. And yet to turn on CNBC at any given point of turmoil during that time - such as in September 2001 - would have led one to believe that staying invested was complete madness.

The bottom line is that being a disciplined, buy-and-hold investor may seem simple - and in some ways it is - but it is certainly not easy. Like everything else in life, we are not rewarded as investors for sitting still in the easy times. It is enduring the tough, emotional times such as we are currently in that makes us our money as stock investors. And this is precisely why the flighty masses who flee for the exits when things seem the worst are the same people who never make any money in the stock market.