Investing In Difficult Markets
- 1. Going the Distance How to build endurance for difficult markets
- 2. The Dow posts a record high…the markets tumble in heavy trading. It can be difficult to maintain a long-term perspective during challenging economic times. But as top athletes will tell you, the only way for them to win is to avoid distractions, remain focused through difficult times, and keep the goal in mind. The same is true for investing. While maintaining a long-term perspective through volatile markets isn’t always easy, it can be rewarding. How can you avoid the distraction of short- term market moves and build endurance for the long run? Here are some time-tested principles of successful investing that can help you stay focused regardless of what’s happening in the markets.
- 3. Take advantage of market opportunities In volatile markets, investors are frequently faced Corrections should be recognized as part of the with an emotionally difficult choice: whether to keep normal market cycle; savvy investors acknowledge investing even during periods of market turmoil. Yet this, and over time, are confident the capital markets for long-term investors, falling stock prices aren’t will recover. The market has experienced 20% or all bad news. In fact, during market lows, you may greater market corrections 10 times in the past have the opportunity to expand your portfolio with 60 years. Despite this, if an investor had invested quality investments at attractive prices. $100 in the S&P 500 Index 60 years ago, the initial investment would have grown to over $78,000 While historical performance is not indicative of today! Your financial representative can help you put future performance, the market has trended upward market volatility into perspective and work within over the long term, and investors who purchased your investment plan to help you invest appropriately. when equity prices were relatively inexpensive experienced a significant gain. Market Corrections of 20% or More From 12/46 Through 7/08 900 Source: Bloomberg This is for illustrative purposes only and 800 not indicative of any investment. The data depicts the Standard & 700 Poor’s 500® Index, which is an unmanaged group of securities and considered 600 to be representative of the stock market in general, from 12/31/46 through 500 7/31/08. Shaded areas represent market declines of 20% or more. Returns 400 assume reinvestment of all distributions. It is not possible to invest directly in an index. The index is 300 unmanaged and does not take transaction costs into consideration. Past 200 performance does not guarantee future results. 100 0 12/45 12/47 12/49 12/51 12/53 12/55 12/57 12/59 12/61 12/63 12/65 12/67 12/69 12/71 12/73 12/75 12/77 12/79 12/81 12/83 12/85 12/87 12/89 12/91 12/93 12/95 12/97 12/99 12/01 12/03 12/05 12/07
- 4. Consequences of Missing the Best Trading Days in the S&P 500 Index 18,000 Source: Bloomberg. This is for illustrative 16,000 $15,954 purposes only and not indicative of any investment. The chart 14,000 depicts the ending investment value of $12,337 $10,000 in the S&P 500 12,000 Index for all trading days as well as for time periods $9,919 in which the best trading 10,000 days are missed. Returns $8,174 assume reinvestment of all distributions. It is not 8,000 possible to invest directly $6,789 in an index. The index is 6,000 $5,703 unmanaged and does not take transaction costs into consideration. Past 4,000 performance does not guarantee future results. 2,000 0 All Trading Missing 5 Best Missing 10 Best Missing 15 Best Missing 20 Best Missing 25 Best Days Trading Days Trading Days Trading Days Trading Days Trading Days Don’t try to time the market The simple investment maxim of “buy low and sell As the above chart shows, if you were out of the high” generally produces positive results. However, market on the 10 best trading days over the last complete success at market timing requires consistent decade, you would have lost nearly 37 percent of knowledge of when the high and low points have portfolio growth. A hypothetical $10,000 investment been reached. This is a talent beyond the capabilities on September 30, 1998 in the S&P 500 Index of even the most seasoned professional. The odds of would have grown to $15,954 by September 30, successfully timing the market become even slimmer 2008. Missing only the five best days would have when you consider that, historically, the biggest lowered your portfolio value to $12,337. The lesson? market gains are often clustered into very short time History has shown that, for most investors, the most periods. So even if you’re able to avoid significant important factor in long-term success is time in the downturns, missing just a portion of a recovery market, not timing the market. can impact substantially your portfolio’s long-term performance. Stock Market Contractions and Expansions 1973 - 2006 $100 Contraction Expansion Stocks
- 5. Don’t go it alone As the past few years have shown, the markets are the actions they are taking today; actions that are unpredictable and rife with volatility. This makes the based upon a process that integrates both insurance value of working with an investment professional to and investment products. It is an integral part of our build a sound, time-tested investment strategy even investment philosophy. more critical. Your Northwestern Mutual financial representative The mission of the Northwestern Mutual Financial will work with you to help you understand Network is to develop enduring relationships with the actions needed to meet your future financial our clients by providing expert guidance for a goals. As part of this process, he or she is guided lifetime of financial security. “Financial Security” by Northwestern Mutual’s 10-point investment means bringing to our clients a feeling of confidence philosophy and asset allocation approach. that they will realize their financial goals through This proven investment approach will help your representative to: 1. Solve your risk-based needs first. 2. Provide expert guidance to help develop your long term investment strategy. 3. Create a strategy consistent with your risk tolerance, time horizon, and goals. 4. Determine a diversification strategy using asset allocation to meet goals. 5. Use professionally created quality investment portfolios designed to match your asset allocation strategy. 6. Use rebalancing to remove emotion from decision making. 7. Manage the impact of taxes and inflation. 8. Evaluate the asset allocation relative to your long term goals and benchmarks. 9. Help you resist the temptation to change your strategy during up or down market movements. 10. Encourage you to start early, invest regularly, and use dollar cost averaging. Of course, no investment strategy can assure a Talk to your Northwestern Mutual financial profit or protect against loss in declining markets. representative for more information. He or she can Investors should consider their ability to continue show you how sticking to a solid investment strategy to purchase through periods of low price levels. and maintaining a long-term perspective can help you build endurance to reach your financial goals even during times of market uncertainty.
- 6. Stay the course A market downturn can test the resolve of even some periods of decline have been severe, overall the most focused investor, causing them to second- the market has grown with time. For instance, guess their long-term financial decisions and sell the stock market fell from its peak at month- at precisely the wrong time. However, there’s end May 1990 to its trough in October 1990 by compelling evidence to support the importance of –14.7 percent, but grew by 354.8 percent from “staying the course.” November 1990 to its next peak in June 1998. Understanding general stock market behavior Of course, this does not mean stocks will can help you maintain a disciplined approach to experience positive returns every year and no investing, especially during difficult markets. The one can predict market declines with certainty. regions shaded in red highlight the contraction However, the stock market can add real value to phase of a stock market cycle, and the blue regions your portfolio over the long term. The important show the expansion phase. A contraction is defined lesson is to not let short term declines keep you by a time period when the stock market value from reaping the gains of long term investing. The declined from its peak by 10% or more. These key is to work with your financial representative declines seem to happen at random and last for to formulate a plan to fit your goals, time horizon varying time periods. Since 1973, the market has and risk tolerance – and then stick with it. experienced seven market contractions. While Stock Market Contractions and Expansions 1973 - 2007 $100 Past performance is no Contraction guarantee of future results. Expansion This is for illustrative purposes only and not indicative of any Stocks investment. An investment $10 cannot be made directly in an index. ©2008 Morningstar, Inc. All rights reserved. 4/1/2008 Returns and principal invested in stocks are not guaranteed. $1 About the data Large company stocks in this example are represented by the Standard & Poor’s 500®, $0 which is an unmanaged group 1973 1977 1981 1985 1989 1993 1997 2001 2005 of securities and considered to be representative of the stock Cumulative return market in general. An investment 400% 354.8% cannot be made directly in an index. The data assumes 281.5% reinvestment of all income and 200% does not account for taxes or 85.9% 86.5% 98.3% transaction costs. 71.2% 62.6% 0% -42.6% -14.1% -16.9% -29.5% -14.7% -15.4% -44.7%
- 7. Market Leaders Vary Over Time Source: Large-Cap 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 S&P 500; Mid-Cap S&P 400; Small-Cap Inter- Inter- Large Real Large Large Inter- Real Real Core Inter- Real Inter- Real Inter- S&P 600; Real national national Cap Estate Cap Cap national Estate Estate Bond national Estate national Estate national Estate NAREIT HIGHEST 32.9% 8.1% 37.4% 35.3% 33.4% 28.6% 27.3% 26.4% 13.9% 10.3% 39.2% 31.6% 14.0% 35.1% 11.6% RETURN Equity; International MSCI EAFE; Core Real Large Inter- Large Core Real Small Small Inter- Bond LB U.S. Estate Cash Mid Cap Cap Mid Cap national Cap Mid Cap Bond Estate Cap Cap Mid Cap national Mid Cap Aggregate; High Yield 19.7% 4.2% 30.9% 23.1% 32.3% 20.3% 21.0% 17.5% 8.4% 3.8% 38.8% 22.6% 12.6% 26.9% 8.0% Bond LB U.S. High Yield; Cash CITI 90 Small Real Small Small Small Small Small Real Inter- Real Large Core Day T-Bill Cap Estate Cap Cap Cap Mid Cap Mid Cap Cap Cap Cash Estate national Estate Cap Bond 18.8% 3.2% 30.0% 21.3% 25.6% 19.1% 14.7% 11.8% 6.5% 1.7% 37.1% 20.7% 12.1% 15.8% 7.0% This is for illustrative High High High High purposes only and Yield Large Yield Real Core Small Core Yield Yield Small Small Large not indicative of Bond Cap Bond Mid Cap Estate Bond Cap Bond Bond Bond Mid Cap Mid Cap Cap Cap Cap any investment. 17.1% 1.3% 19.2% 19.2% 20.3% 8.7% 12.4% 11.6% 5.3% -1.4% 35.6% 16.5% 7.7% 15.1% 5.5% The data assumes High High High High High High reinvestment of all Yield Core Yield Yield Yield Yield Large Yield income and does Mid Cap Bond Bond Bond Bond Cash Cash Cash Cash Mid Cap Bond Bond Cap Bond Cash not account for 14.0% -1.0% 18.5% 11.3% 12.8% 5.1% 4.7% 6.0% 4.1% -14.5% 29.0% 11.1% 4.9% 11.8% 4.7% taxes or transactions High High High High costs. This chart is Large Core Real Inter- Core Yield Yield Yield Small Large Large Yield based upon past Cap Bond Estate national Bond Bond Bond Bond Mid Cap Cap Cap Cap Cash Mid Cap Bond index performance 10.0% -2.9% 15.3% 6.4% 9.7% 1.9% 2.4% -5.9% -0.6% -14.6% 28.7% 10.9% 3.0% 10.3% 1.9% and is not indicative High of future results. Core Inter- Small Core Large Large Inter- Core Core Yield Small Indexes are Bond Mid Cap national Cash Cash Cap Bond Cap Cap national Bond Bond Bond Cash Cap unmanaged and 9.8% -3.6% 11.6% 5.3% 5.2% -1.3% -0.8% -9.1% -11.9% -15.6% 4.1% 4.3% 2.7% 4.8% -0.3% cannot be invested LOWEST in directly. RETURN Small Core Inter- Real Real Interna- Interna- Large Core Core Real Cash Cap Cash Bond national Estate Estate tional tional Cap Cash Cash Bond Bond Estate 3.1% -4.8% 5.8% 3.6% 2.1% -17.5% -4.6% -14.0% -21.2% -22.1% 1.1% 1.2% 2.4% 4.3% -15.7% Source: Large-Cap S&P 500; Mid-Cap S&P 400; Small-Cap S&P 600; Real Estate NAREIT Equity; International MSCI EAFE; Core Bond LB U.S. Aggregate; High Yield Bond LB U.S. High Yield; Cash CITI 90 Day T-Bill This is for illustrative purposes only and not indicative of any investment. The data assumes reinvestment of all income and does not account for taxes or transactions costs. This chart is based upon past index performance and is not indicative of future results. Indexes are unmanaged and cannot be invested in directly. Build a well-diversified portfolio It’s important to remember that the market is made investing in just one. If you diversify your portfolio up of many parts – small-cap and large-cap stocks, across different asset classes, your financial security growth and value stocks, domestic and international isn’t tied to the fluctuations of a single investment. stocks, bonds of different countries, maturities and However, it is vital to understand that diversifying qualities, and cash equivalents. won’t provide any down side protection in broadly declining markets. Each of these asset classes has different risk and return characteristics. The market cycle dictates that Another important lesson to keep in mind is that they will go in and out of favor – some have positive chasing the performance of last year’s winners years when others are negative; some have record doesn’t guarantee future success. Instead of trying gains when others experience average gains or even to predict which asset class will be the winner, your losses. financial representative can help you invest in a well diversified portfolio, based on your goals, risk The most widely accepted way to help reduce the tolerance and timeframe, to maximize your returns risk of investing is diversification – spreading money while minimizing your volatility. among a variety of investments as opposed to
- 8. Be a consistent investor While you can’t control how markets perform, you average cost may ultimately equate to a higher return can control how much you invest and when. Like when the market bounces back. the fabled race between the tortoise and the hare, the investor who moves steadily toward his or her Dollar-cost averaging may be a way to gradually goal may be more likely to succeed than the one who approach volatile markets. In the example below, darts in and out of the market. an investor systematically investing $600 a quarter would have purchased 114 shares by the end of the Although past performance does not guarantee 4th quarter (30 + 40 + 24 + 20 = 114), representing future results, history shows that by investing a total investment of $2,400. Divided by the total regularly over the long term, you can reduce the number of shares purchased, the average cost per impact of market fluctuations on your overall share is $21.05. This is less than the average market portfolio. With dollar cost averaging, a set amount price of $22.50 ($20 + $15 + $25 + $30 = $90/4 is invested at regular intervals, no matter which quarters = $22.50). direction the market is headed. That way you buy more investment units when the market is down and Dollar-cost averaging will not protect against losses, fewer when it is up. This helps even out the average but your financial representative can help you price per unit, hence “dollar cost averaging,” and determine if using this strategy as part of your overall decreases market timing risk. The result of a lower plan may help you get more from your investments. Standing Up to the Bear Dollar Cost Averaging: A hypothetical $600 invested systematically for lower average cost per share For illustration only. 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr The data does 50 Number of Units Purchased Average Market Price* $20.00 $17.50 $20.00 $22.50 $40 not represent any Dollar-Cost Average Price* $20.00 $17.14 $19.15 $21.05 particular investment. Price/Unit *Cumulative average price No investment is risk free, and a systematic 40 investment plan does 40 not ensure profits or $30 $30 protect against losses in declining markets. Units $25 Price 30 30 $20 24 $20 20 20 $15 $10 10 0 $0 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- 9. Rebalancing Can Change the Shape of Portfolio Risk Rebalancing can increase the Higher Probability consistency of returns Rebalancing can reduce the possibility of disappointing returns Source: Northwestern Mutual Wealth Management Company lio r tfo Po ed a nc b al re n- Rebalancing can No ol io increase the r tf Po median returns d ce l an ba Re Lower Probability Lower Expected Return Higher Expected Return Source: Northwestern Mutual Wealth Management Company Let rebalancing work for you Even during difficult markets, some of your investment risk – and the fact that it is unintentional investments may perform better than others. This doesn’t make the potential negative impact any easier means that the percentage of each of your asset to take. classes may have shifted from your original target. That’s why it is important to rebalance your Your financial representative can help you take an portfolio, if necessary, to bring your asset allocation objective approach to periodic rebalancing, keeping back into line with your goals, risk tolerance and your overall performance and goals in sight. Intensive time frame. analysis has gone into weighing the return potential of the different assets against their risk profiles to A systematic approach to rebalancing also is an create an optimal portfolio mix. Your representative important way to help keep emotion from interfering understands that getting that dynamic right is critical with a portfolio’s performance. It’s easy to see why to achieving your long-term financial goals. As the an investor might find it hard to sell even a part of performance of the various assets in the portfolio an investment that has helped them significantly differ over time, the mix that was so carefully created improve their net worth. Unfortunately, that will change. Your representative will work with you sentimental attachment to the holding can make it to correct any imbalances in your portfolio helping easier to lose the returns it has produced. Emotion to ensure that your investments continue to reflect causes the investor in this case to increase his or her your desired risk/reward profile.
- 10. All investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Although stocks have historically outperformed bonds, they also have historically been more volatile. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. Bond investors should carefully consider risks such as interest rate risk, credit risk, securities lending, repurchase and reverse repurchase transaction risk. Greater risk is inherent in investing primarily in high yield bonds. They are subject to additional risks, such as limited liquidity and increased volatility. There is an inverse relationship between interest rates and bond prices. Investing in foreign securities is subject to certain risks not associated with domestic investing such as currency fluctuations and changes in political and economic conditions. Specific sector investing such as real estate can be subject to different and greater risks than more diversified investments. Declines in the value of real estate, economic conditions, property taxes and tax laws and interest rates all present potential risks to real estate investments. Northwestern Mutual Financial Network (NMFN) is the marketing name for the sales and distribution arm of The Northwestern Mutual Life Insurance Company, Milwaukee, WI (NM) and its subsidiaries and affiliates. Securities are offered through Northwestern Mutual Investment Services, LLC, 1-866-664-7737, a wholly owned company of NM, broker-dealer, registered investment adviser, and member FINRA and SIPC. The Northwestern Mutual Life Insurance Company • Milwaukee, WI www.nmfn.com 92-0536-01 (0308) (REV 1008)