Money Matters: How to invest long term

By Judith McGee

The Daily Record Newswire

Warren Buffett is famous for his long-term investment perspective. He has said he would be comfortable holding even if the market shut down for 10 years!

Investing with a long-term view is important with stocks and real estate. No longer is it easy to buy properties and quickly flip them or to leverage one after another to amass a large real estate or equity portfolio.

It is challenging to hold equities during periods such as 2000-2002, when the stock market fell for three years in a row, or through 2008, the worst year for the Standard & Poor's 500 since the Great Depression. Times like those can frazzle anyone's nerves. Choosing an investment strategy is only half the battle; the other half is sticking to it.

What is the long term? It's a personal definition and depends on personal financial goals and when the individual wants to achieve them. A 70-year-old retiree may consider long term to be three to five years. A 30-year-old may consider it to be 10 to 20 years. Young people can take more risk because they have more time.

History teaches that the shorter the holding period, the greater chance of experiencing loss. The decade ending in 2008 and 2009, which encompassed both the tech crash and the credit crisis, left the S&P 500 with negative returns. The last 10-year period with negative returns was the one that ended in 1939.

People who try to time markets generally exit too late and re-enter too late. Many manage emotionally. Today, confidence is waning for both consumers and corporate leaders. Corporations are sitting on more than $7 trillion in cash waiting for government direction. Individuals are guided by the Internet.

Develop a game plan

Guidelines that anticipate turbulent times can help investors prevent emotion from dictating their decisions. Investors might determine in advance that they will take profits when the market rises by a certain percentage, and buy when the market has fallen by a certain percentage. Or, they might adopt a core-and-satellite approach, and use buy-and-hold principles for most of the portfolio and tactical investing based on a shorter-term outlook for the remainder.

Core holdings are not liquidated in volatile times. Satellite holdings take advantage of current trends or can be defensive positions.

Play defensively

Some investors prepare for volatile periods by re-examining their allocations in sectors that have historically been defensive -- including consumer staples, utilities or health care.

Dividends can help cushion the impact of price swings and provide payments during the wait for better days.

Retirees may worry about a market downturn and the impact on their income. Think before reacting. When stocks are sold in a period of falling prices, investors may never recover their losses. The dividend income is lost along with the principal.

Identify strategic reasoning

Why did you make a specific investment? Are those reasons still valid? When markets go off track, understand why you made specific purchases. Would you buy them again?

Fears propagated by the media this summer look similar to those from a year ago. In August 2010, the stock market made a dramatic turn upward. Markets are cyclical. Take a longer view.

Keep cash in reserves for the shorter term and hold quality investments for the longer term. A cash cushion large enough to ride through a tough market can help reduce anxiety and prevent ill-advised moves.

Ordinary people cannot follow the intricacies of all our political, economic and social drama. There will always be plenty to worry about. Manage financial lives with both offensive and defensive strategies.

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Judith McGee is the chairwoman and CEO of McGee Financial Strategies Inc., an independent registered investment adviser. She is a co-branch manager of, and offers securities through, Raymond James Financial Services Inc. in Portland, Ore. Contact her at 503-597-2222 or judith@mcgeenet.com.

Published: Tue, Sep 13, 2011

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