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When Recession Fears Surface, Check Your
Plan — Or Make One
It's been a wild week on Wall Street. When trading reopened
on Tuesday after the Martin Luther King holiday, the Federal
Reserve Board responded to world pressure and swooped in with a
rate cut to put a floor on Dow losses that were approaching 20
percent since last October. By today, things seemed to be
stabilizing.
But what about tomorrow? And then next week, and the weeks
after that?
If this question fills you with worry, then it's pretty clear
you're operating without a plan, or at least one you haven't
recently checked. That's OK. When worldwide market worries
surface, it's easy to get scared. It's particularly easy when
we've had such major market calamities as the U.S. mortgage
debacle and the lingering disarray in the banking and investment
industries.
But sudden action is usually a mistake. In the late 1980s,
Harvard psychologist Paul Andreassen made news with a research
project that found that people who listened to market news
actually made lower returns. Why? Because those who sold — or
bought — during a market swing probably found a day later that
the market was really running on hype, not fundamentals.
You pay a financial planner to devise a financial strategy
that matches your risk tolerance and long-term financial goals.
No, there is absolutely no way to guarantee that you'll never
lose money. But if a plan truly matches you, the noise shouldn't
make a difference, particularly if you don't need the money
today.
So the next time world markets spike or slide, ask yourself:
What's my plan? If you've worked with a financial
planner such as a Certified Financial Planner™ professional,
you should be able to articulate those goals all by yourself or
refer to an investment policy statement you made together. Much
of the riskiest investing, overbuying and panic selling during
the late 1990s and early 2000s could have been avoided if
individual investors had sought advice for achieving long-term
specific goals such as retirement or a college education.
What's my risk tolerance? At your first meeting with a
planner, you should have discussed a number of questions about
how you handle risk and what your expectations were about
investment returns. You might have had to do this more than once
if your risk tolerance was low but your investment expectations
were high — low-risk investors can't expect the highest returns.
That's part of the education process when you visit a planner.
Am I prepared to stay invested — no matter what? We
all remember the "Tech Wreck" of 2000. At the worst of
that downturn, investors bailed out of the stock market or
drastically cut back, only to get back in after they were
"convinced" that the market was rebounding. In
reality, they missed out on stock market gains during the early
stages of recovery, and that's costly in the long run. Of
course, some investors looking for that late 20th century
investment high also got into the real estate market, and they
perhaps learned a similar lesson when that market started
heading south two years ago.
In 2004, SEI Investments studied 12 bear markets since World
War II. Investors who either stayed in the market through its
bottom, or were fortunate to enter at the bottom, saw the
S&P 500 gain an average of 32.5 percent (not counting
dividends) during the first year of recovery. Investors who
missed even just the first week of recovery saw their gains that
first year slide to 24.3 percent. Those who waited three months
before getting back in gained only 14.8 percent.
Am I diversified? The NASDAQ lost 39 percent of its
value just in 2001, and another 21 percent in 2002. Meanwhile,
real estate investment trusts, which performed poorly in 1998
and 1999 when stocks were booming, had banner years in 2000 and
2001, performed so-so in 2002, and had an excellent 2003. Bonds
also returned well during the bear market. Your planner, based
on your risk profile, should have you in diversified investments
that fit your goals.
Do I still feel the same way I used to about returns?
Having a long-term investment plan doesn't mean make the plan
and leave it to gather dust. You and your planner are a team.
Both of you should talk and decide when it's time for a detailed
review of your investment goals and whether or not they should
change. An annual conversation makes sense if nothing's going
on, but life events like death, divorce, kids moving out, and
illness are good reasons to do a head-to-toe review of a
financial plan.
If you're worried this week, there's no reason why you
shouldn't call your planner to calm your nerves and confirm what
you're doing. And if you've never talked to a planner before,
now might be a pretty good time to start.
February 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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