How to Have a Sound Financial Plan and Stay Invested for the Long Haul

by Marc Lichtenfeld , Investment U’s Healthcare Specialist Wednesday, February 9, 2011: Issue #1446

“Even the Roman Empire took 400 years to fall. I assume your investment horizon is a little shorter than that.” So said my colleague, Alexander Green, at The Oxford Club’s recent Private Wealth Seminar in Costa Rica. His words were a warning shot to any investors listening to the investment doom-and-gloomers out there, busily predicting the end of the world. Alex was driving home a point that we’ve made countless times here at Investment U: Markets rise and fall, and trying to time them is an act in futility.

So what should you do instead? Simple. Have a sound financial plan and stay invested for the long haul. And the best route to success? See below…

Concerned? Let History Ease Your Worries

Alex’s discussion got me thinking about the woes of the past few years and how people are having a tough time envisioning a meaningful recovery . I won’t rehash the myriad problems and ugly statistics here. You know what they are by now. What I will say, though, is that while the climate is undoubtedly tough, is it really so different from previous downturns? I’m not talking about the epic crashes of 1929 and 1987… everyone’s done that. Rather, I’m referring to lesser-known crises. Why? Because while they caused a similar level of panic that we’ve seen today, they not only worked themselves out… but the economy actually prospered afterwards. For example…

How Silver and a Railroad Collapse Triggered the Crash of 1873

Heard of the Panic of 1873? A worldwide depression was triggered when Germany stopped minting silver thaler coins, used in Europe for over 350 years. The decision sparked a drop in silver demand and set off a ripple effect… American silver mines suffered, as did railroads, which hauled less silver. Like the dotcom boom, railroads were highly speculative and 89 out of 364 went bankrupt. That caused several major banks to fail, too. U.S. policy changed from backing coins with gold and silver to just gold. This was seen as a sign of an instable money supply and investors refused to buy long-term U.S. bonds, which drove interest rates higher.

The New York Stock Exchange stopped trading for 10 days. Over 18,000 businesses failed and unemployment shot up to 14% in 1876. Construction was halted, wages were cut, real estate fell and corporate profits disappeared. In response, voters turned against the incumbent Republicans, handing control of the House to the Democrats in 1874. Sound familiar? The crisis lifted in 1879 and the country enjoyed prosperity until the next downturn in 1893…

Deja-Vu in 1893

In 1893, rampant railroad speculation again sent the U.S. economy off the tracks. As railroads and banks collapsed, unemployment soared from 3% in 1892 to 11.7% in 1893 to 18.4% in 1894. It was the worst depression the United States had ever seen (until the 1930s). In the 1894 elections, the Democrats got hammered at the polls and lost control of Congress. Again, sound familiar? The economy recovered in 1897 and by 1899, unemployment sat at 6.5%, with rapid GDP growth occurring. I’d bet my last dollar that if you’d told an American in 1894 that economies are cyclical and include booms and busts, they’d have responded, “This time it’s different.” They’d have issued the same call in 1907, 1919, 1973, 1987 and 2000. And they’ve been saying it since 2008. Here’s what you need to remember…

Different Problems… Different Solutions… And the “Cure All” Investment Philosophy

In each crisis, a different set of circumstances and problems caused the destruction of so much wealth. Hence, the solutions were different, too. And such fluctuations have occurred since the Declaration of Independence. My guess is that some time in the 23rd century, while people are panicking over the crumbling in value of their lunar real estate, jetpack stocks and the collapse of the banks that funded their speculation, they’ll tell anyone who’ll listen, “This time it’s different.” And the economic Armageddon of 2008 will be consigned to history as just another in a long list of financial panics. And the solution throughout all this upheaval? Want Solid, Steady Investment Returns? Go Fishin’…

Regular readers will know that Alex Green recommends The Oxford Club’s “ Gone Fishin’ Portfolio .” Based on his own tried-and-tested investment philosophy, it’s a portfolio of no-load, low-expense mutual funds (mostly index funds) across a variety of asset classes that keeps you diversified and in the market. And most importantly, you don’t have to think about them day in and day out. It’s the foundation on which The Oxford Club’s investing methodology is built and has helped members generate an enormous amount of wealth. It’s also led the independent Hulbert Financial Digest to rank The Oxford Club’s Communiqu