RIDE OUT THE ROLLER COASTER
Investors can be forgiven if they have a queasy feeling in their stomachs. Since early July, the stock market has lost 6% of its value, culminating in a sharp plunge and recovery on July 16. Such volatility, rarely seen in the past five years, is likely to be more common in the months to come.
Faced with such a market, it is critical for America's economic health that investors and corporations maintain a long-term investment strategy. Many of the economic woes in the 1980s were the result of shortsighted decisions. Companies managed for the next quarter, abandoning markets at home and abroad to foreign rivals rather than investing for the future. Money managers, pushing for quick gains, supported this short-term view. But in the 1990s, things seemed to have changed. Companies have stepped up spending on new equipment and, in some cases, have been willing to give up short-term profits for long-run advantage. Baby boomers, worried about retirement, are finally thinking long-term and pouring enormous sums into mutual funds through their 401(k) plans. Small investors, confounding most experts, have continued buying stocks even when the market dipped.
A long-term perspective is easy to maintain while markets are rising steadily. But it's far harder to be patient when the market is swinging widely. Small investors with retirement funds at stake will have to learn to stick out the inevitable declines. Economic studies suggest that the average investor has a time horizon of about a year--but that won't be enough.
U.S. companies now have a chance to show their commitment to long-term innovation, investment, and planning. In recent years, soaring markets have made it cheap for companies--especially small startups--to raise funds for spending and expansion. Perhaps they will now have to pay more for their capital. But if the U.S. is serious about competing over the long term, business must be willing to keep investing.