Don't Let Wild Markets Give You The Jitters

FINANCIAL FOCUS

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Although our Rim Country weather has been quite pleasant lately, there has been plenty of turbulence in the financial world.

As an investor, how should you respond?

Before we answer that question, let's review the recent stock market numbers. In the week of Feb. 26 through March 2, the Dow Jones industrial average fell 4.2 percent -- the worst weekly percentage drop for the Dow since March 2003.

What caused the correction?

Two key factors jump out. First, investors may have reacted to the possibility that Chinese authorities are reining in market speculation. In a market as big -- and as fast growing -- as China, such a move can easily have large ramifications. Another possible cause of the market decline is the news that the United States economy is slowing to a more moderate pace of growth.

Will the decline continue? And, if it does, how far will stock prices fall? No one can really answer these questions with any certainty. Market declines often begin and end without warning. However, regardless of the length and severity of a market downturn, you'll want to consider these moves:

  • 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.
  • Look for buying opportunities. Everybody knows that it's a good idea to "buy low and sell high" but many investors do just the opposite. They chase after "hot" stocks, whose price may already be peaking, and they sell stocks whose price is falling, in an effort to "cut losses." But 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. The best buying opportunities are often those stocks whose fundamentals are strong but whose price has dropped substantially.
  • Think long term. The recent 4.2 percent drop was big news. But as weeks turn into months, and months into years, will the impact of this drop be meaningful? The answer is that we don't know. To put some perspective on this question, look back 20 years, to March 1987, when The Dow Jones industrial average stood at around 2,300. Since that time, the Dow has gone up about 420 percent -- an increase that's 100 times as large as the size of last week's drop. Of course, as you've no doubt heard, past performance is no guarantee of future results, so you can't necessarily count on past performance as a predictor for the future. But it's a fact that the stock market numbers have historically trended up. So, 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.

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