The recent market downturn has taken its toll on investment values. I have been especially concerned with the dramatic losses in asset allocation funds. My experience has been that most investors can’t tolerate the volatility of funds that invest solely in common stocks. Yet, they don’t have the luxury of having so much money that they can completely pass by superior long term returns generated by common stocks. Asset allocation funds combine cash, bonds, and common stocks of domestic and international companies generate adequate rates of return for most investors yet suffer much less volatility than common stocks.



I just received the annual report for American Funds Capital Income Builder. American Funds is one of the oldest and best managed fund companies and is generally well known for their superior performance during times of high market volatility. So this is not a criticism of American Funds. Quite the contrary is true. I am using this fund to emphasize how dramatic this market downturn has been.





Capital Income Builder has been in existence since July 30, 1987 and had prior to its fiscal year ending October 31, 2008, only had negative rates of return in two years. Capital Income Builder lost 10.1% in 1987, the initial year of operations, and 1.6% in fiscal year 1990. With positive returns in 22 of 24 fiscal years and its largest loss being a little over 10%, I was astounded that this fund lost 32.9% for the 2008 fiscal year.



Upon further examination I noted that the fund had gained 20.0% and 20.9% in the prior two fiscal years. The investment had retreated to approximately 2005 levels. I don’t know about you but I was feeling good about my investments in 2005. Thinking in terms that your investments have only given back the last three years of gains should help you view your investments from a more favorable long term perspective rather than the pessimism and panic generated by focusing on short term losses.



A retired client of mine had a small percentage of his retirement nest egg in a very aggressive stock fund. During the market turmoil of 2000-2002 the fund lost approximately 60%. He wanted to sell which is a common knee jerk reaction to an investment loss of this magnitude. He had all the historical statements relating to this fund so it was easy to calculate the rate of return. Even with the large loss, his personal rate of return during the time he had held the fund was 14%. The emotional response was to sell. However upon further reflection and having all the facts, all desire to sell the fund disappeared.



Take stock of your investments. Go back and look at statements from several years ago. You will probably realize like my client that your long term rate of return has been a lot better than you think. It certainly has made me feel better and I hope it does you, too.



Source: Dwight Kellams, CPA/PFS, CFP



Copyright (c) 2009 Karen Bolton