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Investors: Stand by your plan

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CHUCK JAFFEBOSTON (MarketWatch) — Virginia S. lives in the Toledo, Ohio area and is nearing retirement as teacher at a religious school.

These days, she is having trouble with her faith.

That’s not a comment about her religion, but rather about maintaining her confidence in the stock market and economy, and hanging on to her belief that years of planning on a modest salary will pay off.
 ”I keep hearing experts say that consumer confidence is important, but I don’t see anything that could make me confident,” Virginia said via email. “I have time and I wouldn’t mind working longer, but I’m not sure I see it all paying off any more. Why, exactly, would anyone expect someone like me to be confident? What reason do I have to be confident?”

Virginia is far from alone in her flagging sense of trust in the market.  On Tuesday, Investor’s Business Daily released its August figures for the IBD/TIPP Economic Optimism Index — an indicator that typically does a good job of foreshadowing what to expect from more renowned consumer confidence benchmarks released later in the month — and it showed a nice pop in good feelings. That said, the 14.4% pick-up in August left the IBD index at 42.8, which is still deep in pessimistic territory.

Looking ahead

Between the housing bubble, credit crisis, inflation worries, concerns over the weak dollar, the potential for the economy to drop into a recession, a stock market that seems more anxious in falling than rebounding, and more, it’s hard to believe an investor could have any faith and confidence left.

Those flames of despair are fanned in chat rooms and message boards by market timers, who suggest that the best way to go is to be out of the market, or following some specialized system, the kind of thing an average investor like Virginia is not likely to do.

In times like these, it might seem as implausible as the existence of Santa Claus, but yes, Virginia, there are reasons to be confident.

Without sounding like a Pollyanna, here are six of them.

1. Market cycles have not been suspended.

While investors have internalized the idea that stocks return 10% annually, that’s an average figure, and no one should believe the stock market is a guaranteed payout machine.
But down cycles have invariably led to up cycles. While many market observers suggest that people should expect the market to deliver an average of 7.5%-8% on average for the next 25 years, it still won’t be a straight-line result.

“If the time you are buying into that average annual return is negative or zero or two, you can expect that somewhere during your investment life there will be a catch-up period,” says Kathy Kristof, author of “Investing 101.”

It would be great if you could avoid the pain and simply invest during the hotter catch-up time, but most people don’t have that kind of vision or timing.

2. The one place your dollar is going further, these days, is the stock market.

Americans are known for being great consumers and lousy savers, but they stink at buying stocks when they go on sale. The same people who would rush out to the mall the next time they hear about a sale on shoes would run away from high-quality companies that are likely to pay for their shoes five or 10 years down the road.

Great companies will survive bad markets; they won’t always be cheap.

3. Numbers don’t lie, but they can confuse the heck out of people.

If you want to view the glass as half-empty, you can produce market statistics that show the decline in 2008, or a time frame which shows a long stretch where the annualized average gain on the market was 0%.

If you want to show the glass half-full, you ignore the current pain in favor of five-year numbers which show gains of nearly 8% annualized over the last five years, despite the recent pain.
Find the numbers that are most important to you, the ones that act as a cornerstone to your philosophy and decisions. There are many ways to read the market, and more than one picture is correct, but what matters most is what you believe in.

Spend less time worrying about whether the glass is half-full or half-empty and more time worrying about what is in the glass. If you like the looks of the market long-term, then it’s like a glass of your favorite cocktail or brew, and it’s easy to see it as half-full; if you’re lacking confidence, it looks like a glass of mud, and you’re hoping it’s half-empty because you don’t want to choke it down.

4. Diversification is better than the alternative, even when it means that parts of your portfolio are hurting.

If you pull all of your money from the market, you avoid principle risk — the chance that you lose money in the market — but embrace purchasing-power risk, the chance that your money won’t keep up with inflation.

Since financial harm happens in many different ways, the best way to keep your cash out of harm’s way is to expose it to many different forms of danger.

5. Working a bit longer — and putting off Social Security — will do things for your retirement nest egg that regular savings didn’t get done.

Research released recently by T. Rowe Price Associates shows that postponing retirement and waiting longer to take Social Security will dramatically increase the staying power of your retirement savings. Christine Fahlund, senior financial planner for the T. Rowe Price Group, says that delaying retirement and Social Security from age 62 to age 70 can double a person’s income in retirement.

Working longer may not be anything to crow about, but it is possible to play catch-up, even in times when the market is not giving you much help.

6. It feels so bad, but it hurts so good.

Typically speaking, the best investment decisions are the ones that feel the worst when you are making them, the ones that try your faith and confidence.

For someone like Virginia, having confidence can be its own reward. In the words of Saint Augustine: “Faith is to believe what you do not see; the reward of this faith is to see what you believe.”

Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.


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Investors: Stand by your plan

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