Don’t Panic

It is very easy to be frightened into hastily making exactly the wrong investment decisions given the current economic situation. Before following the crowd over the edge of the cliff, stop, sit down, take a deep breath, and review where you are, how you got there, and where you’re going. One FPA-NV chapter member sent this letter to her clients:

Dear Client:
Well, we have made it through another crazy week on Wall Street.  The market has been down, the market has been up, and the market has been flat, all in the course of one week.  To say that it has been a volatile time is clearly an understatement. 

It is these times that require patience, diligence, and rational decision making.  With that framework in place, we continue to monitor and evaluate the stock market, the credit markets, and congressional activity with an eye on how your specific portfolio might be impacted.

I appreciate your continued patience and diligence.  If there is anything you would like to discuss, please don't hesitate to call.

Regards,
Eleesa Aimaq, CLU, ChFC

Advice given on radio and TV by the pundits may be technically sound, but if applied to your situation could be devastating.  Keep in mind that the on-air advisor has not reviewed your goals, aspirations, risk-tolerance, or current financial circumstances. So what might be right in principle may be exactly wrong for you. So stop and think about it.

It is true that:

there is economic turmoil in the financial services industry relating to banks, insurers, and credit markets;

the Federal Government is working on plans to alleviate the major dangers to the credit markets;

the world equity markets (stock markets) are responding very poorly to the “bad news.”

So, what to do about it. 

If you have been working with a competent financial planner, you will have made a financial plan based upon your specific goals and tolerance for risk.  Your planner will have advised you about the risk/reward relationship and together you would have designed your investment portfolio accordingly. The current market downturn is still within the risk parameters considered by most financial advisors.

You probably diversified your portfolio so that all your assets weren’t subject to the same market risks, and you would have set up emergency funds to be available in case the worst case scenario occurs. Now is not the time to liquidate the poorly performing assets instead of using those emergency funds.

Here’s an example to consider. If you own a home, it’s quite likely that today your home is worth 30% less than it was worth a year ago. Are you going out to find a buyer to sell it now?  Probably not. So why would you want to sell other investments that are currently worth less than they were a year ago? Before selling that asset, ask yourself the following:

Have the basic reasons for owning the asset changed?

Is the business underlying the stock or bond still fundamentally sound? For example if you own IBM, is IBM still okay.  If you own Old Towne Buggy Whips—are they okay? You probably got two different answers.  Keep the one that’s okay and get rid of the one that’s not okay

If you own mutual funds, has the mutual fund portfolio manager been doing as well as or better than the average for similar mutual fund portfolios? If so, why change?

If you sell your asset now, where will you put the money until the market turns around, and if it goes up as fast as it went down, will you be smart enough and quick enough to get back in to recuperate losses realized by selling?

Let’s review some basic principles. Investment markets have cycles. It is generally accepted by most financial professionals that financial goals can be broadly categorized as short term (0-2 years), Intermediate term (2-7) years, and long-term (5+ years). Assets needed for short and intermediate term goals need to be less volatile than assets needed for long-term goals. If you did your planning correctly, you should be okay for 0-5 years out. Even the worst nay-sayers today are telling you to keep liquid for the next 5 years. So if you did your planning correctly, you should be okay.

What to do now.

Review your financial goals and the resources needed to achieve them. Assess your current portfolio to determine whether or not it needs to be rebalanced based upon the current and future economic outlook. Modify your goals if they have changed or become unrealistic. Adjust your portfolio within your risk tolerance to minimize risk while maximizing potential return in the current economic environment. Consider your retirement plan assets the same way you do other assets. How much do you need for short, intermediate, and long-term needs within your retirement portfolio? Rebalance retirement plans accordingly.

If you need assistance, call your financial planner.  If you don’t have a financial planner, you can get a referral by clicking here. Stay calm, rational, and don’t panic. In choosing a financial advisor, there is a difference between the kinds of advisor you choose.