Market Update
By Monrovia Weekly
Published: Thursday, March 27th, 2008
Investing in Uncertain Times
By Howard A. Huckins CFP, ChFC, CLU
A financial environment clouded with economic uncertainty has sent the stock markets into a volatile pattern, resulting in a rocky start to 2008. It is important to remember that fluctuation in the markets is commonplace, including periods with wild swings like we’ve recently experienced.
While many issues affect the markets, one thing particularly true during times like these is that the immediate future can be very difficult to predict. Many commentators and prognosticators may tell you what to expect, but in the short term, it is always a challenge to determine where the market is going. However, history can be an indicator of what might happen in the long run.
In the last ten years, three significant downturns have occurred. In a period of less than two months in 1998, the Dow lost 18.45 percent. In a four-month span of 2001, it dropped 27.36 percent and over nine months of 2002, it declined another 28.98 percent from its peak to its low point. After closing at 7,286.27 on October 9, 2002, the Dow nearly doubled in value within five years before the most recent decline began in October 2007.
Volatile markets can be distracting, but an important message for individual investors is to focus on their long-term goals. Historical records show that stocks go through periods of decline, but over time, markets also recover. One risk for many individuals is to lose faith in the long-term benefits of owning stocks, when their goals require that they accumulate wealth.
Whether the market will suffer a further decline in the coming weeks and months, or if we’re on the verge of a recovery is hard to predict. A better issue to consider is your investment timeframe and what goals you hope to accomplish within that time period. It is at times like these, when markets are most distracting, that the insights of a financial advisor can make a difference. If you have a long-term financial plan in place, now may be a good time to meet with your advisor to track results and determine if your portfolio is allocated appropriate to your risk tolerance and timeframe. If you don’t have a long-term plan, markets like these further illustrate the benefit you can realize by working with an advisor.
Simple Strategies
If market volatility has your attention, you can try to take advantage of the situation by carefully assessing whether your portfolio appears to be properly positioned. Make sure your investments are appropriately balanced based on the level of risk you are willing to accept during short-term swings like we’re experiencing at this time.
If you have money to invest, it is not necessary to keep it “on the sidelines,” waiting for a more appropriate sign that the markets are in a recovery mode. Some investors make the mistake of waiting too long to jump back into the market and as a result, miss several opportunities. An alternative is to consider spreading out your investments over a period of time (6-to-12 months) using dollar-cost averaging. That is one way the market’s volatility can work in your favor. When prices go down, you purchase more shares. When prices are higher, you purchase fewer shares. The result can be that the average price you pay for a share is lower than if you invested a lump sum at a particular point in time. While dollar-cost averaging does not assure a profit or protect against a loss in a declining market environment, it can be a sound investment strategy.
During volatile markets like these, it is important you remain rational and resist the urge to let your emotions drive your decisions. If you are comfortable that your portfolio was on the right track prior to the most recent downturn, it may make sense to hold your position and let time work to your benefit. If historical precedent applies, your portfolio should recover the lost ground and continue growing as it was before the recent decline began.
Columnist Howard A. Huckins is a Senior Financial Advisor with Huckins & Associates(41 East Foothill Blvd., Suite 202 Arcadia), a financial advisory practice of Ameriprise Financial Services, Inc. Reach him at (626) 574-7887 or www.ameripriseadvisors.com/howard.a.huckins
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