“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