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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.In addition to being a
nationally syndicated columnist and Certified Financial Planning
Practitioner, Mr. Voudrie provides personal, private money
management services to clients nationwide. Read more
articles about finances
or investing, or
ask Jeff
financial question. |
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