Military Officer - June 2008 - (Page 50)

financialforum Investment Plan Don’t let volatile markets derail your investment plan. Phil Dyer, CFP, provides some tips to help you allocate your investments so you can begin to build your portfolio. T Dalbar Quantitative Analysis of Investor Behavior Percent gain from 1987-2006 11.8% 4.3% I Standard & Poor’s 500 I Average equity investor Morningstar Investment Data Hypothetical value in dollars of $1 invested 1987-2006 9.31 2.42 2.32 I Standard & Poor’s 500 I Treasury bills I Standard & Poor’s minus 17 best months he stock market has been on a roller-coaster ride lately — the sub-prime mortgage mess, rising energy and commodity prices, and waning consumer conﬁdence have combined to pull the broad U.S. stock market indexes down from historic highs set in fall 2007. The downdraft approached nearly negative 20 percent before slightly rebounding as the ﬁrst quarter of 2008 ended. Trading volumes spiked as many investors rushed to sell and move their money to something safer. Now, billions of dollars in cash sits on the sidelines, awaiting a clear direction from the market. Does this money movement make sense? No, according to data from investment research ﬁrms Dalbar Inc. and Morningstar. Dalbar’s Quantitative Analysis of Investor Behavior 2007 study showed the stock market — as measured by the Standard & Poor’s (S&P) 500 Index — gained an average 11.8 percent a year from 1987 through the end of 2006. During that time, the average stock mutual fund investor earned a paltry 4.3-percent average return — a difference of 7.5 percent a year. Data from Morningstar in the same period showed each $1 invested in the S&P 500 would have grown to $9.31. However, had an investor missed the best 17 months of market performance from 1987 through 2006, that dollar would have only grown to $2.32, a 75-percent lower return — less than that of treasury bills ($2.42). Much of this differential can be explained by investor behavior: chasing “hot” sectors, trying to time the market on the upswing or downswing, and abandoning a long-term ﬁnancial plan due to short-term market moves. However, many investors today are using ﬁnancial advisors to manage some or all of their portfolios, so these results indicate some ﬁnancial advisors might fall into similar patterns, attempting to outsmart the market, resulting in lower returns for their clients. A better option for many investors is to develop a comprehensive, disciplined investment plan and stick with it, regardless of what’s reported on the news. Numerous academic studies indicate asset allocation — not individual stock or mutual fund selection — is responsible for the vast majority (90 percent or more) of investment return. Your investment allocation should be based on an asset mix that meets your long-term investment goals and is appropriate for your age, time frame, risk tolerance, and any special situations, not on the current hot sector, your new broker’s hunch, or media-hyped economic fears. Once you have settled on that mix, stay disciplined. Don’t let market swings or outside events knock you off your game. Next month, we will take a closer look at building a portfolio and sticking with it. MO — Former Army Capt. Phil Dyer, CFP®, is deputy director, Beneﬁts Information and Financial Education. To ﬁnd a ﬁnancial planner near you, contact Garrett Planning Network at (866) MOAA-GPN (662-2476) or www.moaa .org/garrett, or visit www.moaa.org/ﬁnancial center for other resources. PHOTO: SEAN SHANAHAN 50 MILITARY OFFICER JUNE 2008 http://www.moaa.org/communicationsaward http://www.moaa.org/garrett http://www.moaa.org/financialcenter http://www.moaa.org/garrett http://www.moaa.org/financialcenter

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Military Officer - June 2008 Contents MOAA Online From the Editor From the President Your Views MOAA Directory Rapid Fire MOAA Member Services Washington Scene Chapters in Action Financial Forum Ask the Doctor MOAA Scholarship Donors Cover Story: Mission to Modernize World War Web Playing to Win Fitness in Numbers Fighting Infection Pages of History Faces of MOAA Information Exchange Member Books Advertising Index MOAA Calendar Sounding Taps Encore

Military Officer - June 2008

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