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Remember the big picture (aka don’t walk into mall fountains)

January 24, 2011

A couple weeks ago, Cathy Cruz Marrero was walking through the Berkshire Mall in Pennsylvania and texting. She was so immersed in her phone she did not see the large fountain in the mall and walked right into it. Security cameras captured this and then someone posted it on YouTube. The video has gone viral, with more than three million viewers having seen it already.

            With all the technology today it is easy to get wrapped up in what is happening right now. At times this can be helpful, but this technology makes it more difficult to step back and look at the big picture. When we are absorbed with the here and now all the time we may find ourselves doing foolish things (hopefully none of them are videotaped and broadcast throughout the world at least).

            This also is true when it comes to your investments. Anyone can log into the web or watch cable TV and get instant information on our current investments. When you have a 401(k) retirement account or have purchased stocks it can get tempting to track these on a day-to-day basis and forget the big picture.

            This past week some of the major market indicators, such as the S&P 500 and NASDAQ, hit market highs that they had not seen since 2008. This is promising, but most major markets are still lower than their all-time high. These numbers represent a one-time mark for the markets, but this news can help remind us to look at different types of investments and what type is best over the long term.

            The financial crisis and subsequent stock market decline scared many people away from investing in stocks. The risk with owning stocks was shown as the market declined more than 50 percent. Many people who were nearing retirement who were heavily invested in stocks saw a huge chunk of their retirement savings disappear. It was a large enough decline to make us wonder if stocks were still the way to go.

            The S&P 500 hit its low in the past five years during the first part of 2009. Investors who were tired of investing in stocks pulled their money out at this time, having lost close to 50 percent of their investment from the year before.  Then there was a 20 percent gain in 2009 followed by a 13 percent gain in 2010.

            With all these facts to consider, are stocks still the best long-term investment choice? After 2009, the company Morningstar came out with the rate of return for different asset classes from 1926 to 2009 (note these numbers do not include the 13 percent gain in 2010). At the top of the list were small company stocks with an average annual rate of return of 11.9 percent. Then, large company stocks followed at 9.8 percent.  Intermediate term government bonds were next at 5.3 percent, followed by gold and U.S. Treasury Bills at 4.9 percent and 3.7 percent respectively. Inflation for the same time period averaged three percent.

            Now, we’ve all heard that past performance does not guarantee future results. No one can guarantee these numbers over the next 80 years, but if you are saving money for the long term, it appears that a diversified holding of stocks will give you the best growth opportunity. With that being said, we have learned in the past couple of years how important it is to move money you need in the next five years to safer investments that have less return, but also less risk.

            There are a lot of distractions out there for you. There is a lot of noise on TV, the Internet, and on your phones. It is important to not get wrapped up in the moment-to-moment news and keep a larger perspective. Hopefully, by doing this you can avoid walking into your own financial mall fountain.

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