Crisis or Opportunity

The grass ain’t always greener… think it’s tough when asking the “what is the stock market going to do?” question over and over? It could be worse.

Suppose I was a travel agent, a client inquired about a package travel plan to Hawaii. after going through the travel and cost information, he asked me if it is cheaper to fly to California and then take the train to Hawaii.

The point here is that at any crisis, the opportunity is there and can be always seen from a distance than to be concerned about uncertainities. How do you deal with latest market confusions?

First, each 100 point decline in the Dow Jones Industrial Average at current market level is much smaller in percentage terms than when the Dow was at 4,000. For example, a 100-point drop from 9,000 represents a change of 1.1%. A 100-point decline from the 4,000 level of several years ago represents a change of 2.25%.

The key here is to review your holdings, keep your original goals, risk tolerance and time frame in mind.

I want to share some points, that may assist you feel not to be concerned about recent market confusions:

1. You should keep investing regularly – such as the dollar cost averaging into mutual funds – systematic investing is particularly powerful because downside fluctuations can be advantageous in reducing the average price paid per share for a particular issue. This most importantly keeps you focus toward the bigger picture – seeking your long-term financial goals.

2. Keep focusing the long term goal – look at the overall direction of stock prices. While there is no guarantee about future performance, long-term, the direction of the stock market has historically been up.

3. Because interest rates look good, do not be concerned about market declines – historically, significant market declines have been associated with significant increases in interest rates. However, there is currently little or no inflationary pressure in the U.S., and interest rates are on their way down. That’s good news and should help cushion any further stock market declines.

4. Keep reviewing your long-term investment plans — consider balancing portfolios across different investment sectors. It has often been important to be diversified geographically between large-capital/small-capital, and between growth funds/value funds. It is likely that current above-normal volatility will continue, and imprudent action is unlikely to be productive in the long run.

5. Avoid making worse mistakes – retreating from the market at the worst time, such as when the market is under severe pressure, and jumping in with both feet because of greed after market has had a big run up.

6. If you cannot tolerate such stock movements, let the mutual fund professionals handle investing while you keep investing same amount every month – it is very painless and that is what every employee does with payroll deduction toward the retirement plan every pay period.

For more consulting, see your Certified Financial Planner.