MONEY matters

Mark Zaifman's thoughts on money, global economic trends and politics

Panic is Not a Investment Strategy

Mark Zaifman   |    Tue, Aug 09, 2011 @ 02:55 PM
stock market rollercoaster

600 points down in the stock market yesterday, 420 points up today; one can only guess what tomorrow brings our way. If the recent stock market rollercoaster ride has you feeling dazed and confused, you’re not alone.

It was only a few years ago when the entire global financial system appeared on the verge of a meltdown. Stock prices were falling at historical levels and investor confidence was shaken to its core. Many investors hung in as long as they could before finally throwing in the towel. Unfortunately, a large amount of investors sold at the lowest point in the market only to miss the amazing rebound in the market that occurred soon after.

Investor Fear and Market Losses

Investors often reach a "loss threshold" where they are unwilling to continue to risk additional losses.  Unfortunately, selling stocks well into a bear market is a good way to lock in losses, and this type of panic selling often backfires as an effective strategy to combat such losses in a down market.

As the fall and recovery from the recent crash showed, panic is not a strategy. It is often a recipe for magnified losses. Any alterations to an investment strategy should be weighed rationally and with restraint.

Don’t Get Emotionally Hijacked

Over the past few days, I’ve talked with many of my clients about their overall investment strategy. As a conservative investment advisor, I use mainly index funds when designing and constructing a client’s portfolio. Since the majority of my clients are boomers nearing or in retirement, the financial news over the past few weeks has unnerved many of them to say the least.

What has calmed my clients down quite a bit is reminding them of the strategic financial plan we developed and the investment strategy that aligns with their financial goals. When all the news is doom and gloom, it’s so easy to get emotionally hijacked and just want to do something impulsive like sell everything in the market. Make the pain and fear go away is usually what’s motivating this behavior.

Stock markets are unpredictable by nature - that’s what makes them a market. Yet truly understanding how much risk you’re taking, why you’re taking risk, and how your portfolio has been designed to hedge against risk is knowledge you need to understand if you’re to become or remain a succesful investor.

You Have The Power

Yet most important of all, now is the time to make sure you step away from the madness of a volatile stock market, review your investment strategy and evaluate whether you’re taking too much risk and if the answer is yes, then course correct.

Although we have no control over the ups and downs of the market, we do have control over our emotional reaction to the market. This control is powerful and empowering. Please remember this the next time the market takes a nose dive because if there’s one thing we can be sure of - there will definitely be a next time.

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Photo 'Spiraling out of Control' by haven't the slightest