De-Stressing the Markets

For the first in time in about seven years, we find ourselves in a true bear market. The problems in the financial sector, pervasive gloom and doom forecasts and ever increasing oil prices have combined to create one of the most tumultuous financial climates of recent history. Inflation fears, the credit crisis, mortgage foreclosures, tension with Iran, recession woes: it’s enough to give even the most seasoned investor sweaty palms. How can you navigate these tough times without losing your cool?

There are two levels where you can de-stress the influences of the market. The first is in your own portfolio. No matter how your portfolio is structured, there are several key points to remember. Most important, is that you cannot control the market and shouldn’t act hastily. Any portfolio adjustments should be well reasoned. Some investors make the mistake of knee-jerk reactions when markets turn sour and make mistakes that cost them thousands of dollars down the road.

The second thing to remember is that you need to focus on minimizing loss, but recognize that you cannot eliminate it. Some people want to turn to all fixed investments during hard times, thinking they are ‘safe.’ But today, what used to be some of the most conservative investments are becoming some of the most risky. Financial stocks are the perfect example.

To avoid loss completely, some investors are tempted to liquidate all equity holdings and move 100% into cash. You might gain some temporary peace of mind, but you end up costing yourself in the end. Another common mistake during difficult markets is for investors to fall for all-encompassing products that appear to promise them market gains without any risk of loss. These include variable annuities with their guaranteed income riders and equity indexed annuities. If you are tempted to purchase either one of these products, please take the time to do your research and at least read some of my past articles on the subject!

Here’s what I’m doing for my clients. I have their portfolios well diversified between a number of holdings, across a broad range of sectors and strategies. This includes a division between short term and longer term holdings. My shorter term holdings have more trades, to take advantage of trends and special opportunities. I am apt to move these holdings to cash more quickly as the markets turn down.

My longer term holdings include those with long term growth potential and stocks purchased for their high dividend yields. When markets are trending up, I’ll have more money in these longer-term holdings than in shorter term ones. But when markets are trending down like they are now, buy and hold strategies get hammered. So I am more weighted in shorter term holdings, where I move a higher percentage into cash as necessary. However, I’m not as quick to liquidate my high-dividend holdings, since they’re paying us along the way.

If you have most of your money in mutual funds, I certainly wouldn’t leave it up to the fund money managers to decide what is in your best interest. Look at how your money is divided and make sure you aren’t over exposed in one area. Some investors think they are well diversified because they own several funds, not realizing that all of those funds are basically investing in the same pool of stocks.

For mutual fund investors, pre-determine how much loss you are willing to tolerate. Based on that, you may decide that if Fund A drops 10% that you’ll liquidate 25%, etc. That way you are limiting the downside risk but still in a position to benefit should the market turn around..

The second area where you need to de-stress is on the personal side. Keeping the right perspective can make all the difference. As bad as times seem to be, they are temporary. Remember all that we have come through before: wars, the inflation of the 70s, the terrorist attacks of 9/11, etc. We will see our way through today’s challenges as well.

If you find yourself losing sleep, maybe you should take a break from the news coverage for a bit. Focus on what really matters: your family, your faith, your friends. Those are the things that will outlast high gas prices and inflation, and are what make life worth living in the first place. After you’ve relaxed, re-visit portfolio decisions.

Mr. Voudrie is a Certified Financial Planning Practitioner and provides personal, private money management services to clients nationwide. Find out more at www.guardingyourwealth.com.

If you have a question for Jeff, an answer is just a click away.
Find a wealth of information at Jeff's website.