Many people throw their hands up in despair at what happens in the investment world. There seems to be many things one cannot anticipate or control: political turmoil, rising oil prices, fluctuating interest rates, the subprime mortgage crisis. As an investor, are you at the mercy of other events?
Not necessarily. You can't alter the headlines, but you can manage your response to them.
Unfortunately, too many investors are reactive, not proactive. Violence in the Mideast? Time to sell stocks. Oil prices surpassing $90 a barrel? Head to the investment sidelines. Subprime borrowers falling behind on mortgage payments? Put the money under the mattress.
You get the picture. Negative news frightens investors -- and it frequently causes them to take negative actions. If you look back over the years at almost all bad news, you will see a striking pattern: stock prices fall quickly, as people hurriedly sell shares, and then gradually recover and go on to new heights.
A couple of examples. First, consider the Cuban missile crisis. For many of us, it's now just a distant memory, but at the time, it marked a period of extraordinary fear and tension. Not surprisingly, many investors fled the market, and the Dow Jones Industrial Average fell more than 9 percent during the crisis. But the investors who stayed the course, were well rewarded; just six months after the crisis, the Dow had not only recovered the 9 percent it lost, but also posted a nearly 29 percent gain.
Move forward nearly three decades, to the market crash of 1987. After the Dow plunged more than 500 points in one day, a financial panic ensued. At its lowest point, the Dow was down 34 percent. But investors with patience and foresight didn't panic. And four months later, the Dow recouped the entire 34 percent and added on another 15 percent. In fact, that surge marked the beginning of an almost unbroken rally throughout the 1990s.
Past performance is no guarantee of future results, but if investment history teaches us anything, it is: yesterday's events often have little to do with tomorrow's results.
If you create a long-term financial strategy -- one that incorporates a diversified mix of investments suitable for your risk tolerance, individual goals and time horizon -- you can continue making progress toward your objectives, no matter what is going on in the world. Will you always make short-term gains? No. Will you have "bad" months or even years? Almost certainly. But if you chart the course that's right for your needs, and you follow it relentlessly for years, your chances of success are excellent. And that's the sort of news anyone would welcome.
Scott Flake is a licensed financial adviser with Edward Jones. He hosts a weekly investment discussion on Tuesdays at 10 a.m. at 411 S. Highway 87, Suite B.