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A Message from Bob Dreizler, Chartered Financial Consultant:
For more than two decades, I've helped people seek financial
security while honoring their emotional and social concerns.
During this time, I looked for but never found a practical
and engaging money management book I could recommend
to my clients, so I wrote Tending Your Money Garden.
As a specialist in socially conscious investing, I enjoy
educating people about how their investing habits can
impact more than just their assets. I hope this column
will help you enhance your financial situation so you
can fulfill your dreams.
1987 and 2000: Lessons from Yesterday for Today's Investors
Just months after the world greeted the year 2000, the stock
market entered one of its most volatile periods in history.
After five years of steady increases in many sectors of the
economy, investors started to doubt their assumptions. Thirteen
years earlier, on October 19th, 1987, the stock market experienced
its last significant crash, or "correction," as those in the
business like to phrase it.
When the market finally closed on 1987's "Black Monday,"
the Dow Jones Industrial Average (DJIA) had plummeted over
508 points. Even by today's standards, that would be a significant
point drop, but when the trading stopped, the Dow was at 1,738--22%
lower than 24 hours earlier.
Many of today's young cyber-millionaires were in elementary
school then and don't remember that day, but the valuable
investing lessons from the years following 1987 have valuable
lessons to offer investors in 2001:
- Don't panic. By the time the market is in a nosedive,
it's probably too late to get out without a significant
loss.
- Invest for the long-term. Investors shouldn't
let short-term fluctuations, even major ones, change your
strategy. Those who stayed in the market fared better
than those who left. The DJIA made up half of its losses
within 12 days.
- Don't stay out too long. Some investors were
so rattled that they didn't return to the stock market
for years. Following 1987, the DJIA gained 12% in 1988,
27% in 1989, lost 4% in 1990, and didn't have another
down year for the rest of the decade.
Between 1987 and 2000, the DJIA grew by an annualized rate
of return of over 14%. That kind of return would have stunned
most experts from the 1980s. In January of 2000, however,
many investors considered a 14% to be a dismally low rate
of return.
The final five years of the 1990s produced the most sustained
positive stock market in history. Some market watchers speculated--if
you'll excuse the term--that the market might never go down
again. After each small downturn, the market had managed
to rebound quickly, but in March of 2000, stock prices started
to fall and kept falling. Even giant technology companies
lost more than half their value.
The 2000 stock market taught investors crucial lessons--lessons
that financial reporters and investment advisors had been
preaching for some time:
- Buy low. Many 1990s investors preferred to
invest in firms whose share prices were on a continuous
incline, while they ignored stocks that showed a decline
in value. Sometimes a rising stock keeps rising, but
it doesn't climb forever. These investors were like
shoppers at a department store who pass a display marked
"20% Off Sale" in order to buy from the table announcing,
"Just Marked Up 20%."
- Sell high. High-tech investors and online traders
excelled at buying stocks but seemed unwilling to sell.
Stock tips abounded, usually resulting in winning stock
picks, but the fear of missing out on further gains
kept many from realizing any gain at all when the stocks
ultimately plummeted.
- Diversify. High tech stocks did extremely well
in the 1990s, and they will again. Index funds, the
darlings of just a few years ago, will also rebound,
but one-dimensional strategies leave investors vulnerable.
- Think independently. Don't follow the herd,
even in a bull market. Be creative in your selection
of stocks and mutual funds. Think of opportunities or
crises that may arise two years from now and conduct
your own thorough research before making any investment.
Remember, if you're following the herd, and it changes
direction, you just may get trampled.
If there's a consistent lesson the stock market has taught
us over the years, it's this: There are no guarantees,
except one--things will change, so be flexible, patient,
and think long term.
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