DON’T LET WILD MARKETS GIVE YOU THE JITTERS
If you watch the financial markets, you’ve seen just about everything in the last few months. First, the Dow Jones Industrial Average raced from 13,000 to 14,000 in record time. Then, in about four weeks, the Dow lost all these gains and fell below 13,000. What’s a long-term investor to do? Before we answer that question, it might be useful for you to understand why the market soared so quickly and then plunged so far and so fast.
The Dow’s big gain was fueled, in large part, by strong corporate profits, low interest rates and relatively low inflation. But in the past few weeks, those impressive corporate profits and the economic boom in Asia helped kick already-high oil prices even higher. Furthermore, problems in the credit market, particularly in regard to mortgage-backed securities, have shaken investors’ confidence. These factors are widely thought to be somewhat responsible for the sell-off in stocks.
Will the decline continue? And, if it does, how far will stock prices fall? No one can really answer these questions with any certainty. Keep in mind that “corrections” (declines of 10 percent from a market peak) are actually a normal part of the investment process, and we haven’t seen a correction since the spring of 2000, so what is happening now is no cause for panic. Also, market declines often begin and end without warning. Furthermore, even in the midst of these turbulent times, investors still have reasons to be optimistic. After all, the economy is growing faster than three percent annually, inflation and interest rates are still low, corporate earnings continue to outpace analysts’ expectations and economic growth has been strong overseas.
In any case, regardless of what’s happening in the markets, you’ll want to consider these moves:
•Focus on quality. There’s never a “wrong” time to buy quality investments – but there’s also never a better time than when the market is shaky. Quite simply, during market downturns, quality investments – such as stocks of some large companies in developed markets** and top-rated corporate bonds – tend to not drop as far as riskier investments. And quality investments generally bounce back faster when declines are over. Just keep in mind that there are no guarantees that past performance is an indication of future results.
•Look for buying opportunities. The best buying opportunities often occur when the market is down. That’s because a market slump tends to drag down all stocks, even those with good prospects for future growth. Consequently, you might find “good deals” among those stocks whose fundamentals are strong but whose price has dropped substantially.
•Think long term. To put some perspective on the market decline, look back 20 years, to the summer of 1987, when the Dow Jones Industrial Average stood at around 2,500. Since that time, the Dow has gone up more than 400 percent not including fees, commissions, sales charges and taxes which would have a negative effect on these results. Of course, as you’ve no doubt heard, past performance is no guarantee of future results. Still, if you don’t let short-term drops send you to the investment “sidelines,” your patience and perseverance may give you an opportunity to be well positioned for the long term.
No one likes to see the stock market shed so much wealth in a short period of time. But if you concentrate on quality, look for good deals and think long term, you can navigate the sometimes-bumpy roads of the investment world and continue on your journey toward your important financial goals.
*The Dow Jones Industrial Average is an unmanaged index and not available for direct investment.
**Special risks are inherent to foreign investing including political, social, economic and currency risk.
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