Keeping volatility in perspective important for investors

August 21, 2012 

As a professional investment adviser, it's easy for me to rattle off the standard sound bites of advice about being a long-term investor, sticking to your plan gives the best chance for success, and not making emotional decisions, etc.

All this advice is time-tested and investors would be better off if they followed it. But, that's just not that easy to do when the money that represents your financial security is fluctuating wildly during a stock market decline driven by fears of recession or possibly worse.

There is no shortage of articles about how major endowments and pension plans have been far more successful than the average investor at generating returns on their capital.

I believe the main reason is that these large institutional entities have one main advantage compared to the average couple planning or living in retirement. That advantage is they are usually directed by a strongly defined investment policy which is overseen by a board of trustees who ensure the policy is followed.

This is far different than an individual investor who can, with a few clicks of a computer mouse or a phone call to his or her adviser, liquidate their entire portfolio when they get to the point of maximum fear. Unfortunately, this point usually comes way too late to avoid a large part of the loss and usually ends up helping the investor miss out on the recovery, compounding the mistake.

The difference became even more clear to me when I began to serve as a trustee of a relatively large endowment.

Since the mission of organizations like endowments and pension plans is to produce income to benefit the beneficiaries of the plan, the focus is more easily shifted away from temporary distractions like stock market declines that come around every

few years.

These organizations usually have a mandate of being conservative in their planning, which also tends to help avoid needing to push the panic button or the computer mouse on your E*Trade screen.

I would also note that, in retirement, the goal of the individual's investment plan is usually to generate income, just like these larger organizations.

Endowments and pension plans seem to be better at identifying the difference between temporary and permanent impairment of capital. Permanent impairment of capital occurs when a security becomes worthless or when the loss of value is so large that the time and magnitude of returns required to recover make the impact on your wealth a permanent impact.

Temporary impairment occurs when the stock price of a high quality company goes down, perhaps substantially, due to investor fears, but the company is meanwhile still selling as much or more of its product as it was last month or last year, and its profits and dividend payments to shareholders continue to grow.

Generally, with patience, the stock price will recover and go on to new highs. We've seen this in the last few years when stocks tanked during the 2008 financial crisis, but it proved to be a good buying opportunity for these higher quality corporations, many of which are now hitting new all-time highs.

I know it's not easy, but the more individual investors can adopt the behavior of these disciplined institutions, the more it can increase their success.

Tom Breiter, president of Breiter Capital Management, Inc., can be reached at 941-778-1900.

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