The “Get Back to Zero” Syndrome

“Today’s markets are as uncertain as ever!” Well, duh! Google key words like “markets” and “uncertain” and you will see hundreds of references telling you what you already know—the future largely is unknowable and risks abound.

 All you really know about the future is that you will live in it. Everything else is a variable, including how long you will live, the cost of living, and investment returns. For those pondering retirement, health care concerns increase the anxiety factor. For parents with children to educate, increasing tuition costs pose a challenge. Hard work and a rising income may push you into a higher tax bracket as fiscal cliff taxes and The Affordable Care Act levies erode take home pay.

 Uncertainty breeds fear. Our reptilian brain responds to fear by fleeing the source of the perceived threat. On October 9, 2007, the S&P 500 stock index hit a record high of 1,565. On March 9, 2009, the index closed at 676.53, the low point in that bear market cycle. That was a grueling case of déjà vu all over again, as the two-year dot.com crash bear market of 2000-2002 repeated itself in a global credit crisis and housing crash market rout. Given 13 years of market gyrations, investor nervousness and investment hesitancy is understandable.

 On Friday, February 22, 2013, the S&P 500 index closed at 1515.60, about 3.1% off of the all-time high. Worries again are surfacing. As markets approach all-time highs, pundits warn, “Risks are increasing!”

 One 2/21/13 Bloomberg headlined, “Insider sales reach 2-year high as S&P 500 nears a record.” Do sales by insider executives signal rats leaving a sinking ship? Not likely. “Prudence” may be a better descriptor. If you are an executive in your sixties and approaching retirement, and the bulk of your net worth is tied up in your company’s stock, you might wish to diversify. Some of this selling took place in 2012 in an effort to beat rising capital gains taxes. Again, prudence.

 There is a tendency on the part of investors who held on during a prolonged bear market to sell when the value of their holdings approach or get back to where they were at the previous high point. It’s called the “get back to zero syndrome.” “No, I didn’t make any money on the round trip, but at least I am back to where I was.”

The problem is that prices are not back to where they were in 2007 at the high point on the S&P 500. A basket of goods that cost $100 in 2007 cost $110.35 at the end of 2012. In May of 2007 with regular gas at $3.07 a gallon, CNN was bemoaning the impact of record gasoline prices on consumers. The national average for a gallon of regular gas on February 20, 2013, was $3.77, up 23% from the 2007 “record high.” Food prices are rising. Health insurance premiums are up. Taxes are up. A worker making $50,000 per year loses $1,000 in added payroll taxes in 2013 compared to 2012.

 “Getting back to zero” is not a successful strategy.  So what should you do with your money? If you are accumulating savings in retirement plans or personal accounts, make the inevitable market slumps your friend by dollar-cost-averaging and buying more cheaper shares when they are on sale.

 In the recent cycle, increases in the cost of items essential to well-being have outpaced the growth of many investment options. With the potential for longer life in an inflationary economy, merely preserving what you have means retreat. You have to build what you will need for tomorrow. Average money market rates at 0.48% or a 5-year CD at 1.27% won’t cut it.

 Diversify into time-related investment buckets with enough near term safe money to ride through down strokes in markets. Focus on global quality in stocks. Seek income sources that can beat inflation. Understand opportunities in alternative investments. The cost of inaction is rising!

Required Disclosure:  Investing involves risk including the potential loss of principal. No investment strategy including diversification can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results.

 Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪  3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com