Wednesday, December 3, 2008

The Opportunity of a Lifetime?

With global stock markets crashing, many investors have panicked and decided to liquidate their stock holdings. However, although it’s hard to find a silver lining in this situation, this could actually be an ideal situation for investors with an abundance of cash or for young, first-time investors. It may even turn out to be a once-in-a-lifetime opportunity. The reason for this is that while experienced investors have been through market falls previously, they may have also lost money during the latest decline. On the other hand, for those looking at the possibility of investing, this is a good time to get started. But why should novice investors take the risk now, when the markets are falling, to start investing?

Buy Low/Sell High
According to an old investment adage, one should buy when prices are low and sell when they are high. Although there is no sure way to declare that a fall has reached its end, the market would definitely be cheaper after a 45% decline than it was before. In other words, the market is somewhat “on sale.” No one likes buying retail, and with the recent market pullback it could even feel as if the investor is buying wholesale! This could be compared with when a local supermarket runs a “45% off” sale. In this situation, shoppers would be lined up around the block to have a chance to make purchases at rock bottom prices. One classic investment strategy is ''buying the dips.'' An example of this would be to wait for a pullback of at least 10% in prices, and then the investor will make his purchase. This strategy often beats chasing sudden hot streaks that can result in overpaying or worse, buying at the top. And as for those “market timers” who want to see “for sure” that the market is moving back up before they buy, they often never get to enjoy the subsequent rebound.

One of the biggest risks of trying to “time” the market is the potential of "missing" the market. This occurs when an investor, thinking the market will go down, reallocates his investments and places them in more conservative investments. But while the money is on the sidelines, the market shoots up. The investor has, therefore, incorrectly timed the market and "missed" the best performing months. Studies have shown how much an investor can lose by being out of the market. According to research by DALBAR, the numbers are telling. For example, when looking at the returns of mutual fund investors over the 20-year period 1986-2006, we see that the average market timer return was -2%. During this same time period, the S&P 500 Index returned 12%. Additionally, during the 10-year period of 1997-2006, the S&P 500 Index achieved an annualized return of 8.4%. If an investor missed just the top 20 days during this entire period, his return fell to -4%. Keep in mind that historical returns are no guarantee of future success.

Oftentimes the market recovery is so swift that by the time investors have made up their minds to invest, it’s too late. The market will have already recovered most of its losses. We have witnessed those types of upward moves over the last few months. We have seen the market move up by as much as 9% in one day.

Getting Started
Many young couples put their wedding money into the bank, where it accrues virtually no interest. Even at that point, however, it is important to start thinking about the future. How will they be able to afford paying for their children’s weddings in 20 years’ time if their savings do not grow? In this situation, it is a good time to make whatever money you have work for you now. To get started, a young couple will find it very useful to consult with a financial adviser, who will help them to define their financial goals and needs. From this, an investment plan can be drawn up to try to achieve these goals and meet these needs.
If this money is left lying around, doing nothing, there is little chance of growing enough interest to use it to its full potential. Investing is a good option, and the recent market drop may well be in your favor. If you buy at a discount now, this increases the chances of potential success.

Aaron Katsman is President of Global Investments at Profile Investment Services. He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA (formerly NASD), SIPC, MSRB, SIFMA. For more information, go to or call (02) 624-2788 or (03) 524-0942, or email:

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