The stock market has been on a downward trend over the last few days, and many of you may
have concerns about where the market is going. A few of you may even consider making
changes to
your investment strategy because of the drop. If the decline over the past few days
troubles you,
let's address those concerns head-on.
First let's talk about what happened. There are three reasons for the decline.
1.Anxiety that the Federal Reserve Board will raise interest rates during their meeting
early next
month.
2.The doubt expressed by some analysts about whether the rapid earnings growth for most US
companies can be sustained.
3.The statement by the president of Microsoft that the high-tech sector might be currently
overvalued.
You may notice a common thread in these three factors - a lack of definitiveness. There is
no hard
economic evidence to support the stock market decline.
Yes, You Should Be Concerned...
Now let's examine whether you should be concerned that your investment's value has fallen.
Of
course you should. I'm concerned. Personally, I would rather be 6% richer right now. But
we need
to put things in perspective. Even with this decline, the stock market has gone up by 5%
from the
beginning of the year, and 30% over the past 12 months. Stocks are risky investments -
they go up
more often than not, but sometimes they do go down. If you are investing in stocks, you
have to be
prepared to accept occasional short-term losses.
But Remember Your Goals
Also, you should remember your goals. If you were planning on spending all of your money
next
month, then there would be reason to consider pulling your investments out of the stock
market. In
fact, at 401k Forum we never recommend equity investments for investors with very
short-term
time horizons. But you are saving for your retirement. The market will endure temporary
fluctuations
between now and then. Over the long-term however, chances are very good that your equity
funds
will increase in value.
And Stay The Course
So what should you do? Nothing! It's natural to want to take action when things are going
against
you. If I'm driving down the road and I see a car coming at me from the opposite
direction, I move
out of the way. However, when it comes to investing, immediate and strong reaction is not
the best
policy. In August of last year, when I last wrote an e-mail like this, many investors
reacted to a
declining market by transferring out of stocks (a total of $9 billion of equity funds were
redeemed by
401(k) plan participants). Those investors missed the 30% return I referred to earlier.
So do whatever you usually do to ease frustration. Work out at the gym. Play some soothing
music.
Pound a pillow if it helps. Just don't take out your worries on your portfolio.  Lummer's Logic Archives
Scott L. Lummer, Ph.D., CFA, 401k Forum's Chief Investment
Officer, is a recognized expert in the investment field. He has conducted extensive
research on asset allocation, international investing, risk management, mutual fund
analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook.
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