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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:
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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. |
