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Dealing with Turmoil

By: Frank Armstrong

By: Frank Armstrong, CFP, AIF

Economic, political and military uncertainty tends to depress market prices. Resolution of the uncertainty even if events turn out badly tends to restore them. The mechanism is well known, the timing unknowable.

Right about now (February 2003) we are beset with a fair amount of turmoil. I won’t list all the dreary events of the last few years, or the worst case scenarios playing on investors’ fears. The markets are doing their job by reflecting the various concerns. A billion or so participants are re-thinking their valuations as they try to handicap world events. Not that it’s pretty, but it’s part of the game.

So, what should you do about it?

If your Investment Policy is still appropriate to meet your goals, you should probably do nothing. A proper allocation anticipates occasional bad markets and economic cycles. Since we can’t control the market, we need to adopt our investment philosophy to the market reality. That means having enough in short term bonds to meet all of our known cash needs for several years, and perhaps some more to reduce the risk to the point where we can sleep well. Your best response is to stay the course. Remember, you heard it here first: The world isn’t going to end! We have been through lots worse and come out just fine.

On the other hand, if your results reflect the lack of an appropriate Investment Policy, serious over-concentration issues, poor diversification, inappropriate asset allocation or other notable deficiencies, the recent events should serve as a wakeup call. It’s time to do your homework, adopt a plan tailored to your exact needs, bite the bullet and upgrade to a well balanced, fully diversified, sensible portfolio.

If you have been a do-it-yourselfer, now might be the time to delegate those decisions to an independent registered investment advisor. If you have been victimized by a Wall Street firm, you might consider getting objective professional advice. In either case, you can’t afford the advice you are getting.

Bailing out entirely when the markets drop is not an option for successful investors. Folks who buy high and then sell low are left to wonder why they can’t make any money in the capital markets. Their own behavior is the biggest risk they face. The time to measure your ability to tolerate risk is not after the market goes down. So, take no more risk than you can tolerate, plan thoroughly, invest wisely, and then keep a steady hand on the tiller.