The stock market has been in general decline for 2½ years now. It's been difficult for everyone who has had to watch savings and retirement accounts decline in value. Plans for retirement have had to be delayed and working within a budget is now critical for many. Under these conditions it's natural to look back with regret over what we could've or should've done; we may feel out-of-control, or helpless.

It's just as understandable to wonder how much worse things might get, and when will the markets will recover. Some folks may be questioning whether it is smart to be invested in stocks at all. In the midst of all the concern and confusion I'd like to step back for a moment to examine what lessons might be gained from the experience of the past 2½ years.

I believe that one of the most important lessons is to recognize that the future will always be unknowable. Recall for a moment the widespread optimism we felt in early 2000 at the anticipated benefits and investment opportunities of the technological revolution. Compare that with how we feel now after a recession, threats of terrorism, accounting scandals and possible war. We were probably too optimistic then, and we may be too pessimistic now. We don't really know.

Financially speaking, another valuable lesson is that we must have a plan to deal with this uncertainty. A financial plan, properly done, provides for future events that may affect our pocketbooks and gives us the best possible chance of achieving financial success and security. If you had a sound plan 2½ years ago, it should be sound today. A good plan, periodically reviewed and adjusted, provides for the possibility of an extended period of poor investment returns. It must also provide a strategy to deal with inflation.

In fact, despite the severity of the stock market decline, I continue to believe that to a retiree, inflation is the bigger risk. After all, history shows that stock market declines are temporary while cost of living increases are permanent. Ironically, history also suggests that one of the most effective ways to combat inflation is to invest in the stock market. Since 1925, inflation has averaged about 3% per year, while the stock market has averaged over 10% per year. Stocks have been, and I believe will continue to be, an effective hedge against inflation.

What lessons might be learned? First, create a financial plan to deal with life's uncertainties; this plan will allow you to concentrate on your long-term goals, rather than focusing on past or temporary market events. Second, periodically review and adjust your plan, particularly when times get rough. Markets will rise, then fall, then rise again; inflation will continue to erode purchasing power. You have no control over them; however, you can control your financial plan.

Add Your Own Comment