Cents and Sensibility
Cents and Sensibility
The tragic events at the World Trade Center, the Pentagon and in Pennsylvania shocked the nation and the world. As an individual, you no doubt felt appalled and deeply saddened. But as an investor, you also have to deal with the aftershock; specifically, the impact such a horrific event has on the world's financial markets. Stay focused on long
term during crisesThere's nothing you or anyone else can do to control world events, or how the markets respond to them. Consequently, it's important not to base your investment decisions on today's headlines, no matter how dramatic they may be.
Sadly, there have been other national tragedies in our past, although none as horrific as the events on Sept. 11. Thankfully, we live in a country that is resilient, and the financial markets have historically reflected that. And, over the past four decades, the rebounds have come fairly quickly after the onset of a major crisis. For instance, at the height of the Cuban Missle Crisis -- a period of extraordinary fear for most Americans -- the Dow Jones industrial average fell more than 9 percent. Yet, little more than two months later, the Dow had gone up nearly 29 percent.
We can also go back to October 1987, when the stock market crashed. At its low point, the Dow was down 34 percent -- and yet, two months later, the index had regained a full 15 percent. And in the years since then, the Dow soared from record high to record high.
The point is that the stock market is resilient. Throughout history, it has trended upward in the long term, despite short-term blips and crises. Still, it can be difficult to stay focused during calamity. That's why you should follow these basic investment principles:
>> Maintain a long-term perspective. Short-term setbacks can be discouraging, but keep in mind you're not investing for next week or next month. You're investing to achieve long-term goals, such as college for your kids or a comfortable retirement. That's why it's best to look beyond today's events and stay focused on the future.
>> Diversity your portfolio. The best way to protect yourself against short-term market fluctuations is to diversify your holdings. Not all investments respond in the same way to the same circumstances. For example, when stocks are down, bonds may be up, or vice versa. By building a diversified portfolio containing stocks, bonds, government securities and money market instruments, you'll give yourself more opportunities for success.
It's natural to feel distraught in the wake of crises or trage- dies. Yet, by following these few simple guidelines, you'll be able to take the emotion out of your investment decisions.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: gsteele2@pixi.com