A case for equities

Despite setbacks, equities remain important to achieving long-term financial goals

Investing, or remaining invested, in stocks may seem counterintuitive when the broad market declines of 2008 are still fresh in many investors’ minds. However, it is important to keep in mind two fundamental investment concepts that may bolster the case for equity investing: Making investment decisions based on emotions usually leads to subpar returns; and, as the Ibbotson® SBBI® chart below indicates, stocks, even with their sometimes unattractive levels of volatility, remain the traditional investment path to maximizing wealth over the long term.

The risks of emotional investing

Academicians dedicated to studying behavioral finance have developed a range of theories attempting to explain irregularities in the capital markets and to highlight why investors make the choices they do. One of their generally agreed-upon principles could be summed up as follows: Investors are often not as rational as we would like to think they are. Instead, emotions far too often direct their investment decisions.

Whether investing during the euphoria of a market peak, or withdrawing funds in a despondent or depressed state around a market trough, investors often hamper their own efforts at wealth creation by investing emotionally, rather than rationally.

An early 2009 study by DALBAR, a research firm focused on the financial services industry, uncovered some facts concerning the detrimental effects that emotional investment decisions (including buying high and selling low) may have on investment returns. The study, titled Quantitative Analysis of Investor Behavior (2009), focused on the poor decisions that investors often make. It contrasted returns on market indices for the 20-year period ended Dec. 31, 2008, with actual investor returns within equity and fixed income mutual funds. The results of the study suggested that investors sometimes act as their own worst enemy when planning for financial goals. It found*:

• The average equity-fund investor realized an annualized return of 1.87%, compared to 8.35% for the S&P 500 Index;
• The average fixed income investor realized an annualized return of 0.77%, compared to 7.43% for the Barclays Capital U.S. Aggregate Index; and
• At 2.89%, the annualized inflation rate for that same 20-year period outpaced the annual returns that both the average equity and fixed income investor achieved.

Data such as these should give pause to investors choosing to liquidate equity investments that have already declined so severely from their peak, as many investors have done in recent months. Choosing to liquidate equity investments now may likely be doing so at the precise time at which a strong financial opportunity could exist for long-term investors.

*Covering the period from January 1, 1989, through December 31, 2008, the study utilized the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. These behaviors were then used to simulate the "average investor." Based on this behavior, the analysis calculates "average investor return" on both a cumulative (total) and annualized basis. These results are compared to respective indices.

Equity investing remains important to consider for long-term financial goals

Though the committee responsible for dictating the allocations within Delaware Investments asset allocation mutual funds has somewhat reduced its exposures to equity for certain products, reflecting the heightened economic risk that the equity markets face, we have certainly not eliminated equity exposure.

This positioning is consistent with our belief that, despite the significant declines that equity investors have struggled through during approximately the past year and a half, stocks remain one of the most efficient means toward reaching long-term financial goals available to investors. As indicated in the chart below, the total return for equities has outpaced that of bonds or Treasurys for the period shown.

Chart is for illustrative purposes only.
Data on the x-axis is shown in 10-year increments, and ends on Dec. 31, 2008. Ibbotson Associates is a leading authority on asset allocation with expertise in capital market expectations and portfolio implementation.

Though it is easy to be pessimistic about the market forecast for the remainder of 2009, it is also important for investors to recognize that the equity market is a leading indicator of economic activity. Stock prices tend to move down more quickly than broad economic indicators (as the current downturn has clearly demonstrated), but they also tend to recover in anticipation of a broad economic recovery (source: The Conference Board). This is one of the reasons that liquidating equity positions at this stage of the economic cycle may be an imprudent decision for some investors.

The past 18 months have understandably rattled even the most experienced investors’ sense of confidence in the capital markets. Yet when the stormy conditions eventually pass, we believe that long-term investors who continue to invest with clear heads (rather than clouded by emotions) may be in a position to take advantage of the long-term value opportunities that we believe will present themselves as conditions improve.

Views expressed were current as of July 1, 2009, and are subject to change at any time. This material is for informational purposes only and should not be considered a recommendation to buy, sell, or hold a specific security.

Important information

Equity funds will be affected primarily by changes in stock prices.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt.

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although a money market fund seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in a money market fund.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

The Barclays Capital U.S. Aggregate Index is a broad composite of more than 8,500 securities that tracks the investment grade domestic bond market.

Indices are unmanaged. You cannot invest directly in an index.

Views expressed in this commentary were current as of July 1, 2009, and are subject to change at any time. The information is provided with the understanding that Lincoln Financial Distributors is not engaged in rendering accounting, legal, or other professional services. Please seek the services of a competent professional if legal advice or other expert assistance is needed.

Investing in any mutual funds involves risk, including the risk that you may lose part or all of the money you invest. Over time, the value of your investment in a fund will increase and decrease according to changes in the value of the securities in the fund's portfolio.

Investors should consider the investment objectives, risks, charges, and expenses of the investment company carefully before investing. All fund prospectuses contain this and other important information about the investment company and should be read carefully before you invest or send money.

Please request a prospectus by calling 800 523-1918 or by clicking here.

Delaware Investments is the marketing name for Delaware Management Holdings, Inc. (DMHI) and its subsidiaries. DMHI is a Lincoln Financial Group^® company. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Delaware Investments^® funds are distributed by Delaware Distributors, L.P., an affiliate of Delaware Management Business Trust (DMBT), DMHI, and Lincoln National Corporation.

July 2009 (4613)