By Nancy Hadley 10/10/2001 09:07:00

Dealing with downturns

The stock market has always given investors reason to worry. In 1990, it was the Gulf War. In October 1987, it was the greatest stock market decline since the Great Crash of 1929; in 1994, rising interest rates ignited by inflation fears; and in 1998, the global economic and liquidity crisis.

But no matter how many times the stock market has kept investors on edge — no matter how many market gurus have called for the beginning of the end for stock market valuations — the leading benchmarks have eventually managed to rebound and gone on to new highs.

Indeed, there will be periods when the stock market doesn’t recover for an extended period of time. Not just one or two years but many years. However, while past performance is no guarantee of future results, history has shown that if you keep a long-term perspective, your patience should be rewarded.

How do you stick with stocks when all seems uncertain?

Be unemotional about short-term market phenomenon. There are going to be times when certain events, such as a negative economic report or a major political uncertainty will rock the market. Don’t react. Stay the course. All losses are simply paper losses until you sell. If you have time and patience to ride out fluctuations — and you should as a long-term investor, you’ll be in a better position to enjoy the potential gains available from stocks.

See opportunity in negativity. It’s difficult to be optimistic about stocks when other investors are running for the exit. But those who have jumped into the market during periods of uncertainty have been rewarded over time. So look at market downturns as investment opportunities, instead of opportunities to run for cover. Buying on dips will also help to lower your average cost, which may boost your total return over time.

Make sure you are adequately diversified. When you invest in a handful of securities, the performance of one security can have a dramatic impact on the performance of your overall portfolio. By spreading assets among numerous securities — and many types of issues, such as stocks, bonds, mutual funds, etc. you may reduce risk significantly. Bonds can provide a rudder for a balanced portfolio.

Don’t try to be a market timer. Some investors think they can get out of the market when it seems poised for a correction, and jump back in when the market appears ready to rally. Forget this strategy. It doesn’t work. No one, not even the so-called experts, have been able to consistently time the market’s ebb and flow. In fact, market timing can be hazardous to your financial health. Reason: It can leave you out of the market during major market rallies and cause you to jump back in right before a significant correction.

Rely on the expertise of a financial professional. No one likes to feel alone when the going gets tough. So why try to make tough decisions regarding your portfolio when the market starts to rattle. A professional’s expertise and insight could be the difference in helping you achieve your long-term financial goals.

Some people are uncomfortable with volatility. If you cannot sleep at night because of fluctuations in the market you should invest in bonds or certificates of deposits.

As we move through this very difficult time in history, I am confidant that U.S. Markets remain the safest place to invest, and that our economy will emerge stronger.

Interest rates are now at a 50-year low and the government is injecting billions of dollars into our economy through military and infrastructure spending. The Federal Reserve has made $100 billion available to keep our markets liquid, $40 billion has been committed to New York City and the airlines will receive $17 billion in aid. These are all steps to stabilize and kick-start the economy. Predicting the exact time of the pending economic recovery will be very difficult. In order to weather the economic storm, investors should own diversified portfolios in high quality, blue-chip companies. There is great strength in many of these companies.

While the current market reaction to the unfolding war on terrorism may appear ugly, the resolve of America is to restore security, resume its growth, and rebuild for the future. It is easy to get caught in the mood of the moment and panic, but the price of panic is losing sight of much more important longer-term goals. My advice is to keep focused on your long-term financial goals. Americans are resilient, our economy is resilient, and our resolve has always led us to economic global leadership.

Nancy Hadley is a financial consultant with D.A. Davidson in downtown Sandpoint. For her guidance in your market decisions, call 208-263-2010 or 1-800-770-5555.