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What to do? Well, to panic and flail about on the high seas of a downwardly spiraling market is one option. But lest our inability to learn from the historical behaviors of our foreinvestors lead us to poor decision-making, let's take a look at what actions have historically worked well, and what investing decisions typically go wildly wrong.
In August 1987, a Michigan autoworker, on the advice of no one, invested his entire life savings of $25,000 in the stock market. He moved in one fell swoop. No dollar cost averaging for him. He got in, all the way, all at once. And out was where he fled in late October after the 19th became Black Monday and the Dow Jones Industrial Average had collapsed by 508 points (down 22.6% in one day). Annualized, that became for him-well, one annus horribilis as the Queen might say! The mistake this "investor" (or rather, "speculator") made was to let his emotions and lack of basic investing information drive his decisions. Had he not liquidated, after ten more years he would have earned sweet double-digit annualized returns.
Establish an investment strategy
While others are fretting and envisioning the worst, the best defense in a bear market, and in any market, is to take a rational approach. First, review your investment strategy. If you don't have one, that's where to start.
Determine the right asset allocation for you
A twenty-something investor should invest aggressively whereas a fifty-something investor nearing retirement should reduce exposure to market price volatility. Guidelines range from an aggressive mix of 93% stocks and 7% fixed income, to a conservative mix of 15% stocks, 65% fixed income, and 20% cash investments. It's critical to review and understand the risk you undertake within the stock and bond mix; that is, small to large capitalized companies; domestic and foreign companies; and low to high credit ratings.
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Invest by dollar cost averaging
Enter into new investments by dollar cost averaging: investing the same sum of money at regular intervals in a security, no matter its rise or fall in price.
Don't attempt to time the markets
Have you stayed true to your investment strategy, or have you been swayed by predictions of further gloom and doom, and in a moment of exhausted confusion, abandoned your plans and struck out in panic? Have you attempted to catch the waves of the markets by selling in an attempt to avoid losses and then repurchasing at lower prices? Give it up. Market timing doesn't work. Said mutual fund manager Peter Lynch, "Trying to time the market…is a waste of time. I don't know anyone who has been right more than once in a row." By staying out of the market for as little as two weeks' time, you could miss a sharp upward move, significantly reducing your returns and leaving you even more baffled about what to do next.
Be patient and you will be profitable
"Slow and steady wins the race," is the motto of Ariel Capital Management in Chicago. You might be miles behind that hare; you might be tens of thousands of dollars behind your portfolio's previous market value, but never forget: jack-rabbit hops will cause you to careen off course and will nearly guarantee lower returns.
Never berate yourself-keep positive
Is your battered portfolio pinching your lifestyle, such as plans to buy a new home, pay for college education, or retire soon? Ask yourself-"Did I assess my risk appetite honestly, and invest accordingly? Did I get a little greedy and deviate from an appropriate exposure for my short-term objectives?" This was a common temptation during the boom years of double-digit stock returns. Do not attempt to regain losses through quick fixes. Quick fixes are rarely lasting fixes. Simply regroup and keep your chin high. Scale back your lifestyle a notch or two if you must. Learn from those decisions gone bad.
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Develop and consistently review your investment objectives. Invest new money via dollar cost averaging. Retain money you need in the next three to five years in the conservative category. Invest more aggressively the funds you'll tap in 10 - 30 years. Rebalance assets when they deviate from your targeted allocation by 5 percent. (I.e., if your stocks have dropped in value, move cash into equities to maintain the percentages you've selected.) The good news is, your portfolio return from inception is probably a healthy double-digit gain in the stock categories despite recent falls.
In bull markets or bear, blue skies or gray, stay true to the basics. Never, ever panic, lest the dull, trudging tortoise overtake you. History will repeat itself, and you, for one, will be poised to take advantage of whatever direction it takes.
Copyright 2003 Sharon Durling
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