What Should You Know
If you’re not sure what to do in the current market situation, you’re not alone. Investors around the world have been battered recently, as the crisis in the U.S. housing market took on broader implications. On September 29, following defeat of the bailout legislation by Congress, the Dow Jones Industrial Average posted a record 778-point loss, making a cumulative 27% decline since reaching its highest all time closing on October 9, 2007. Over that same period, the Standard & Poor’s 500 was down 29.8%, and the Nasdaq Composite shed 30.7%. Even when the emergency Economic Stabilization Act was later passed on October 3, the markets were down sharply, on fears that this bill wouldn’t avert a severe recession. The questions on everyone’s minds are: Just how bad are the markets and the economy going to get? What should we do about it? Is it time to sell every stock we own, withdraw all of our money from banks, and bury everything in the backyard? Or are we really looking at an opportunity to purchase stocks at low prices?
The truth of the matter is that no one, anywhere, knows for certain where the economy or stock market is headed. But emotion is often an investor’s worst enemy, both on the way up and on the way down. The last stages of a bull market are often led by investors desperate to join the crowd and make fast money, often entering the market just as it is peaking. Conversely, the last stages of a bear market are often marked by losses as investors finally give up, selling stocks for fear of future declines. The way to overcome these emotions is to think calmly and rationally, refresh your perspective on the long-term and recent history of the market, review your investment strategy, and methodically analyze your current portfolio. Only after you’ve taken these steps should you consider any changes to your investments.