Should You Abandon The Stock Market?

Before we get started, let's all take a moment to breathe and to think about all of the things that we have to be grateful for, because let's face it, things could be a lot worse. If you're reading this, you're most likely sitting in an air conditioned (or heated depending on if you live in the Midwest) building instead of struggling to survive in a cave somewhere, so we all are really fortunate.

The Sky Is Falling!

It's understandable that the average investor has probably lost more than a little sleep over the past couple of weeks with news headlines many times reading like something from a financial doomsday or sorts. Sure, things like bank failures, Wall Street titans like Lehman Brothers falling into bankruptcy, a fledgling housing market, and proposed record $700 Billion bailout *(see below) congress is enough to make to make anyone think, "What's the point of all of my hard work?". The point right now is to take a moment to think things through, formulate a plan, and not to make any panic-stricken "the sky is falling" decisions.

An Emotional Roller Coaster Ride

When you formulated your investment plan for your future, did you have a time horizon of 2 months or 20 years? Of course it's going to be on the latter side! The point of any properly structured portfolio is to be diversified enough so that fluctuations in the market don't wipe out everything that you're working so hard to achieve!

Now when most people look at investing, they many times exhibit behaviors that I equate to being on an emotional roller coaster. Imagine for a moment the track of a roller coaster. You have peaks, dips, and even the occasional corkscrew, and while it's exhilarating (and maybe a little frightening) you end up safe and sound at the end as long as you finish the ride. What many people try to do when it comes to investing is they try to time when they enter and exit the market and, frankly, for most people that just doesn't work.

When do you think it the best time to get into the market: at the top or at the bottom?

When the market is constantly going up, like the bull market of the 90's, many investors can't get their hands on enough capital to invest because there's a feeling of euphoria that goes along with the "I can't lose!" attitude, but this is typically the riskiest time to invest since most "investors" (read: speculators) tend to get in at the top of the cycle and get out at the bottom.

Now does that sound like a good idea? Buy high and sell low?

The 14 Steps of the Investment Roller Coaster

Have you said or thought any of the following:

Euphoric: "I should quit my job and invest full-time! Look at the money I'm making!"
Startled: "I think I lost money this week."
Nervous: "What happened? What's going on?"
Scared: "I didn't know my account could drop so fast!"
Desperate: "There's no point of selling now. I've lost too much."
Panic-Stricken: "My account is down how much? As soon as I get back to even, I'm getting out."
Defeated: "Get me out now!"
Resigned: "I'm never going to invest in the market again!"
Hopeful: "The market looks like it's starting to turn around."
Encouraged: "I should have stayed in the market!"
Upbeat: "It seems like everyone is making money in the market. Maybe I should start investing again."
Confident: "I've already made some money! This is great!"
Thrilled: "Investing is easy! Maybe I should put all of my money in the market!"

Does any of the sound familiar? When do you think the greatest opportunity to make money in the market is: when everyone is buying and prices are at their peak or when everyone is selling, essentially resulting in an equities "clearance sale"? Multi-billionaire investment wizard, Warren Buffet, recently made a minimum $5 billion bet on Goldman Sachs and really on the financial system as a whole, and I'd say he has a pretty good track record!

Keep in mind, where one person sees nothing but despair in a situation, another sees great opportunity.

The main thing right now is to not lose sight of your objectives due to a short term panic. Review your portfolio with your financial advisor, make adjustments as necessary, and know that these current challenges, like everything does, will pass.

* On a side note there is a precedent due to the S&L crisis of the late 80's where the government spent approx. 6 years and $125 billion ($200 billion in today's dollars) to acquire nearly 1000 failed saving & loans, along with defaulted mortgages and foreclosed properties, allowing by these institutions to remain solvent and adding stability to the financial sector.