Published August 2005

Maintain control of your investment outlook

Many people throw up their hands in despair at what happens in the investment world.

There seem to be so many things a person can’t anticipate or control: political turmoil, rising oil prices, terrorist attacks, fluctuating interest rates, natural disasters, etc.

As an investor, are you simply at the mercy of these and other events? Not necessarily. You can’t alter the headlines, but you can manage your response to them — and that can make all the difference.

Unfortunately, in our modern culture of “media hype,” too many investors are reactive, not proactive. Violence in the Middle East? Time to sell the stocks. Oil prices breaking $60 per barrel? Head to the investment sidelines. Downgrading of General Motors and Ford credit ratings? Put the money under the mattress.

You get the picture. Negative news just plain frightens investors — and it frequently causes them to take self-defeating actions.

Of course, this phenomenon is nothing new. Look back through the years at almost any major piece of bad news. You will see a striking pattern: Stock prices fall quickly, as people hurriedly sell shares, and then gradually recover and go on to new heights.

Want a couple of examples? First, consider the Cuban missile crisis. For many of us, it’s now just a distant memory or an event in a history book, but at the time, it marked a period of extraordinary fear and tension for Americans as war with the Soviet Union seemed imminent.

Not surprisingly, many investors fled the market, and the Dow Jones Industrial Average fell more than nine percentage points during the weeks of the crisis. But those investors who stayed the course were well rewarded. Just six months after the conclusion of the missile crisis, the Dow had not only recovered the nine percent decline, but it posted a nearly 29 percent gain in addition.

Now, let’s move forward nearly 30 years, to the market crash of October 1987. After the Dow plunged more than 500 points on what has become known as “Black Monday,” a financial panic ensued. At its lowest point, the Dow was down 34 percent. But investors with patience and foresight didn’t panic.

In fact, four months later they looked pretty smart, as the Dow recouped the entire 34 percent and added on another 15 percent. That surge marked the start of an almost unbroken rally throughout the 1990s.

You can find countless other revealing, if less dramatic, examples of the market bouncing back after a piece of unsettling news. Past performance is no guarantee of future results, but if investment history teaches us anything, it’s this: Yesterday’s events often have little to do with tomorrow’s results.

If you create a long-term financial strategy — one that incorporates a diversified mix of investments suitable for your risk tolerance, individual goals and time horizon — you can continue making progress toward your objectives, no matter what’s going on in the world around you.

Will you always make short-term gains? No. Will you have “bad”months or even years? Almost certainly. But if you chart the course that’s right for your needs, and you follow it relentlessly for years and decades, your chances of success are excellent.

And that’s the sort of news I believe we all should be focusing on.

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