BOTLS,
Difficult as it may be during these types of market corrections, the following article gives us a good sense of what our actions should or should not be. I thought it to be a good read.
Market curses
The five dirty words you can't say in personal finance
By Chuck Jaffe, MarketWatch
Last update: 9:30 p.m. EST Jan. 22, 2008
BOSTON (MarketWatch) -- Anyone watching the stock market's opening implosion on Tuesday morning couldn't miss the commentators' regular use of curse words.
No, they were not swearing as the stock market fell by about 465 points off the open, but they were using the dirty words of personal finance, the ones that often curse the masses to financial self-destruction, the dirty words that seemingly have been on everyone's tongue over the last few weeks as stock market turmoil has ordinary folks ready to abandon long-term plans in favor of safe havens. Ironically, the bad words should give investors a clue that the commentary they are getting may be leading them astray. That's why it's imperative to face the current market upheaval with an eye and ear out for the following dirty words: now, next, must, top and best.
Here's a guide to the five bad words, the siren songs they tend to sing, and why investors should put up their guard whenever they hear them:
1. Now, as in 'Given what has been happening on the market, what is an investor to do now?'
Truth be told, most people aren't investing for "now," they're looking ahead anywhere from five to 55 years. Reacting to the present situation makes for good television and radio, but it's largely ignored by the financial advisers and by people trying to build lifetime portfolios.
Indeed, when analysts talked about Tuesday's decline representing a "panic sell-off," they were talking mostly about institutional investors, who typically have a mandate that they must try to make money -- or prevent losses -- in the current environment rather than over the long haul.
The pressure to "do something now" completely ignores the idea that there are many times when the best thing someone can do "now" is "nothing."
So when experts say they would avoid certain market sectors or would pursue specific investment ideas, they do it without regard to the asset-allocation plans of the audience. Even if investors might want to follow the advice to a point -- taking some profits off the table -- a knee-jerk sell-off could leave their portfolios less diversified, which actually increases overall risk and volatility at precisely the wrong time.
About the only time a "now" story is offering decent advice to a wide audience is when it talks about something that is tax-sensitive, like filing for a program or a tax deduction before some deadline passes.
2. Next, as in 'the next logical move is ...'
It is impossible to tell someone what to do next when you don't know what they have already done. As such, anyone suggesting what to do next without figuring out what has already happened could easily be sending you in the wrong direction.
Jumping into the next thing is a problem unless you know precisely where you will land. It's easy to say "buy consumer staples and dump financial services and real estate." Even if the advice is spot on (and studies of the financial press make it clear that doesn't happen all that often), there is no way to know if the message is appropriate for everyone who receives it.
As such, whenever some media pundit or feature article suggests what to do next, figure out first if they are talking to you, giving advice that truly applies to someone in your situation.
3. Top, as in 'Here are the top performers in certain time periods or market conditions'
Top performance is a measure of what has happened up to now but is not necessarily an indication of what will happen in the future.
Every 24 hours, the world turns over on someone who is sitting on top of it. Moreover, getting to the top of the heap typically requires extraordinary behaviors; for example, a stock mutual fund may be a top performer during a downturn because it has gone mostly to cash. That may protect against downside risk, but it means that the fund may be on the sidelines when conditions change, missing out on the start of a rebound and becoming a laggard during good times.
Don't take someone else's word on the top investment to buy now; make sure it is tops on your list, fitting in with the rest of your strategy.
4. Best, as in 'the best thing for investors to do now is ...'
What is best for one investor is not necessarily best for another. For example, whenever one investor buys a stock, another is selling it. Presumably both think they are taking the best action in the deal; the trade works if both sides believe it is appropriate.
When it comes to financial advice, no one has your best interests at heart quite the way you do; guard those interests by making sure a move truly is the best thing for you to do, not the best thing to grab audience attention.
5. Must, as in 'here's what investors must do to get through this'
Like "now," the word "must" creates a false sense of urgency and is designed to capture instant attention.
For most investors, however, success is built on having a plan filled with securities they believe in and not on changing directions every time the wind blows and brings out some new list of what someone must do now with today's top performers and best strategies for whatever market conditions come next.
When the five cursed words of personal finance are used in conjunction with advice, consider whether they are wrapped in information that is truly useful rather than just interesting. Daily or hourly market fluctuations tend to be interesting but not particularly useful for someone whose time horizon has thousands of market days left.
Chuck Jaffe is a senior MarketWatch columnist. His work appears in dozens of U.S. newspapers.
