How To React To Market Turmoil
"Guarding Your Wealth” is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.
(PRWEB) April 27, 2005 -- Last week, the stock markets suffered some of their
greatest losses in two years. The Dow was down 3.6% for the week, the Russell
2000 4.91% and the NASDAQ 5.18%. Many of the major averages lost close to 2% on
Friday alone. How should you react when the stock market drops significantly?
Read on to find out.
First, let’s look at the big picture to better
understand the causes of this decline. Currently, a host of mixed signals has
created uncertainty over the strength of our economy. Oil prices have surged,
inflation fears have escalated and economic growth has appeared to slow. Big
blue chip companies such as GM and IBM have reported disappointing earnings.
On the other hand, General Electric released impressive earnings figures
reflecting organic growth of 10%. Citicorp and Wachovia also exceeded
expectations.
As usual, the signals add up to one big question mark.
There are no concrete conclusions you can draw from them one way or the other.
So the questions remain: has our economy hit a soft spot? Is a recession in our
near future? Will inflation fears come to pass? Will the spike in oil prices
spell doom for our economy? Or will all the bad news just blow- over and amount
to nothing?
I wish I had the answers. And the truth is, no one can say
for sure. When in doubt, markets tend to focus on the negative, not the
positive. Markets are very emotional and sometimes end up fulfilling their own
prophecy.
Individual investors are very emotional, too. And therein lies
the problem. Investing shouldn’t be an emotional decision. It should be a
strategic one, with a long-term course of action carefully thought out and
planned for. Changes in long-term strategy should not be made because of
short-term events.
Unfortunately, few investors are able to detach
themselves emotionally from their investments. They fall into a fear/greed cycle
that not only costs them money, but also peace of mind. They end up worrying
needlessly about the natural fluctuations of the market.
Investors must
slay the ghost of markets past. But many allow the events of 2000-2002 to make
them so fearful that they don’t get to enjoy the benefits of investing in
equities. Even small downturns in the market cause them to lose sleep. They only
focus on the negative and convince themselves the sky is falling. Yet when the
markets trend up, they want to grab all of the gains.
The markets were
down significantly most of 2004 but ended the year up 9%. Those who left the
market in fear didn’t have the confidence to get back in early enough to
participate in the gains. Investors that want to have all of the gains without
going through any losses are going to be very disappointed.
It’s like
installing a swimming pool. You know it’s a major investment and you plan to use
it for years to come. What if every time there was a cold snap or a rainy day,
you had a bulldozer come and fill in the pool? “We can’t use it now. We’ve made
a big mistake!” Then later, when the sun shines again and warm weather returns,
you say, “I need my pool back! Let’s put one in again!”
Obviously, you
wouldn’t do such a thing. Weather changes are expected and planned for. You shut
the pool down in the winter and blow the lines so the pipes don’t burst. You
have a solar cover to hold in the heat during swimming season and chemicals to
keep the water clean and clear. You don’t fill in the pool with dirt every time
something goes wrong. You recognize it is a long-term investment and you use
tools to manage the short-term events.
It should be the same with your
investments. Equities are important to a well-balanced portfolio. Don’t abandon
your long-term strategy just because the market has declined several percent.
Make tactical decisions based on short-term events within the context of your
overall strategy. For instance, I utilize a proprietary portfolio management
system that naturally reduces exposure during declines and increases it during
upward trends. That allows my clients to pursue the long-term use of equities
without losing sleep every time the market drops.
Got questions? Go to
www.guardingyourwealth.com and click on ‘Ask Jeff’. I’ll
answer you personally.
In addition to being a nationally syndicated
columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides
personal, private money management services to clients nationwide.
Looking for an energetic expert who is passionate about financial and
wealth management? Mr. Voudrie is an excellent speaker who will excite and
inspire your audience. Mr. Voudrie is available for a limited number of speaking
engagements, television appearances and radio talk shows. For booking
information, email e-mail protected from spam bots.
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Source : http://www.prweb.com/releases/2005/4/prweb232345.htm