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 Money
Management Newsletter: General
Interest
The market's down... What do you do now?
By Rob Whipp
Money Management Newsletter
If you can't make any sense of the stock market these
days and question whether you should risk more of your hard earned savings
and be an opportunistic buyer of depressed equities or finally throw in
the towel, dump the dogs you so enthusiastically purchased a few years
ago and put your money in a piggy bank, you're in good company. One has
only to read the financial section of any newspaper to notice that there
are many different opinions about future stock market direction from people
who's job it is to study these things. How can there be such a polarity
of belief? If the experts can't agree amongst themselves if we will see
a slow recovery or fast recovery or more market declines how are you supposed
to know what to do with your investments? As you can probably guess there
is no easy answer but there are some things that you must realize before
you take any action.
The first thing you have to realize is that market
forecasters don't know what is going to happen. They just make guesses,
educated ones of course but still just guesses. No one has perfect market
knowledge or the ability to foresee events such as the unbelievable political
and corporate tragedies of the past year that have had a huge impact on
investor sentiment.
The second thing is don't fall for media doom and gloom
about the market because these are the same referral sources that helped
hype the market and the supposedly new paradigm a couple of years ago
when new dot com millionaires were multiplying faster than rabbits. They
showered us with glowing reports of the market and in so doing helped
foster the irrational exuberance that the chairman of the U.S. Federal
Reserve, Allan Greenspan mused about in 1996. During those heady days
of investing exuberance there were of course media articles warning of
the dangers of a hot market and the potential for a crash but these were
overshadowed by stories of the nouveux rich which received most of the
attention. You will of course find commentaries that are positive about
the current potential for the market but these are not nearly as prominent
as the negative media sentiment. If you notice a relationship here you
are on your way to freeing yourself from media hype so that you can instead
focus on investment fundamentals.
Thirdly, look at market history. A graph of market
indexes over time reveals the simple news that markets go up and down.
Sometimes after they rise rapidly there is significant drop followed by
another rapid ascent. History has a way of repeating itself.
Fourthly, look at the alternatives. Bond prices are
currently very high and the yields correspondingly low. If you intend
on buying bonds now to preserve capital you may find their values actually
start dropping rapidly if interest rates rise or if the stock market starts
to recover. Bonds may be close to a market high much the same way stocks
were before the bubble burst.
Fifthly, before you sell any of your non-registered
investments consider the after tax impact. What I mean by this is don't
unwittingly trigger taxable capital gains (if your investments have any
left). Instead do strategic selling to trigger capital losses than can
offset capital gains distributions that may be received on mutual fund
holdings or gains on investments you may have sold earlier this year.
You can then re-purchase the investment sold after waiting 30 days to
crystallize the loss or buy another similar investment immediately if
you want to stay in the market. Are the investments you currently own
consistent with your goals and risk tolerance and do they represent a
reasonable allocation of your portfolio? If the answer is no, consider
reallocating them. If yes, consider adding to them. In both cases though
take a reasoned approach based on your personal situation.
Lastly, before you buy any new investment, study its
trading pattern over the past two years to see if you can live with the
volatility. You should have learned something about your real risk tolerance
if you have persevered through this most recent market decline. If you're
a mutual fund buyer look at the capital class structures offered by many
fund companies for non registered accounts to eliminate the tax impact
of switching between investments.
The important thing to remember is that investing
is a process. You establish a process of buying products that suit your
goals and allocate them according to your risk tolerance levels and a
reasonable expectation of long term rate of return. If you stick to the
process and occasionally rebalance your portfolio as needed you can pretty
much ignore the media hype.
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© , Fiscal Agents Money Management Newsletter
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