Every once in a while patience is rewarded without the customary long, tedious wait. Look how fast a payoff came for investors in stock mutual funds who resisted the impulse to panic and sell when the terrorists struck on Sept. 11.
Only three weeks after trading resumed with a fearsome wave of selling, the market had staged an impressive recovery and was offering investors higher prices on average for their holdings than they would have received if they sold right away. The patience premium has persisted through all the ups and downs ever since.
As events unfolded after the attacks, fund investors who redeemed their shares right away got out at the closing price Sept. 17, the first day trading resumed. The market indexes plunged to new bear-market lows that day, and kept falling for the rest of the week.
Yet by Oct. 10, the Standard & Poor’s 500 Index, the Nasdaq Composite Index and the Dow Jones Industrial Average all closed above where they finished the day on Sept. 17.
They stayed that way through Oct. 31, when the S & P; 500 showed a 2.2 percent total return since the close Sept. 17; the Nasdaq Composite 7 percent, and the Dow Jones Industrials 1.9 percent.
By the evidence, quite a few real-life investors got zapped by their panic buttons. The Investment Company Institute reports a record outflow of $29.5 billion from stock funds in September less than 1 percent of total assets in stock funds, but still a good-sized chunk of money.
New resolve
So now the hair-trigger sellers may be feeling remorseful. Next time, they vow, we’ll remember: Don’t just do something, sit there! Trouble is, avoiding panic isn’t quite as easy when the heat is on as all the primers make it sound.
If you’ve put yourself in a risky position going into such a moment, says fund manager Marty Whitman, “panic may be appropriate, rational behavior.”
Think of panic as nature’s way of telling you your investment tactics are out of synch with your circumstances.
“If you went into panic mode,” says Todd Cleary, manager of financial planning services at the fund firm of T. Rowe Price Associates, “you probably had too much invested in stock funds or the wrong kinds of stock funds and you weren’t diversified in line with your risk tolerance.”
What to do about that now? Though past trades can’t be undone, investors can set up their holdings to minimize the danger of panicking again the next time the markets suffer a jolt.
“You can’t control the markets,” Cleary says in a commentary on Price’s Web site. “Focus on what you can control making sure your stock-bond mix is in line with your risk tolerance.”
One reason people struggle with this simple-sounding idea is the inherent difficulty of assessing risk in all its varied and ever-changing forms. Who had anything like “anthrax risk” figured into their asset-allocation plans before Sept. 11?
But diversification and a long-term approach to investing can go a long way toward managing risks of both the known and unknown variety. There are, after all, only three things stock prices, interest rates and other investment variables can do rise, fall or stay the same. It takes no special wizardry to set up a diversified plan that recognizes all those possibilities.
Keep some money in stocks in case they rally; keep some money out of stocks in case they don’t. Adopt a “laddered” approach to fixed-income investing, owning securities of different maturities to protect yourself from interest-rate fluctuations.
The beauty of investing, as opposed to many forms of gambling, is that it leaves you room to limit risk and still give yourself a good shot at a decent return. The odds of success are likely to be enhanced when the risk of panic is removed.
Chet Currier is a columnist with Bloomberg News.
